Best Buy Company Limited (Best Buy) bought a machine for $400,000 on 1 July 2019. The machine had an estimated residual value of $50,000, and had estimated useful life of 10 years, or had an estimated operation output of 50,000 hours. The financial year-end date of Best Buy is 31 December
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Best Buy Company Limited (Best Buy) bought a machine for $400,000 on 1 July 2019. The machine had an estimated residual value of $50,000, and had estimated useful life of 10 years, or had an estimated operation output of 50,000 hours. The financial year-end date of Best Buy is 31 December.
Required:
(a) Compute the depreciation on this machine in the years of 2019 and 2020 using the following methods.
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(i) Straight-line (with depreciation calculated to the nearest whole month)
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(ii) 200%-declining-balance (with half-year convention)
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(iii) Units-of-output method (hours of operation:2,500 in 2019; 5,000 in 2020)
2019
(i)$________ (ii)$________ (iii)$________
2020
(i)$________ (ii)$________ (iii)$________
(b) Which of the method(s) in part (a) would result in the highest net profit in the year of 2019?Briefly explain.
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