Swanson & Hiller, Inc., purchased a new machine on September 1, 2008 at a cost of $108,000. Themachine’s estimated useful life at the time of the purchase was five years, and its residual valuewas $8,000.Instructionsa. Prepare a complete depreciation schedule, beginning with calendar year 2008, under each ofthe methods listed below (assume that the half-year convention is used):1. Straight-line.2. 200 percent declining-balance.3. 150 percent declining-balance, switching to straight-line when that maximizes the expense. b. Which of the three methods computed in part a is most common for financial reporting pur-poses? Explain. c. Assume that Swanson & Hiller sells the machine on December 31, 2011, for $28,000 cash.Compute the resulting gain or loss from this sale under each of the depreciation methods usedin part a. Does the gain or loss reported in the company’s income statement have any directcash effects? Explain.
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.
Swanson & Hiller, Inc., purchased a new machine on September 1, 2008 at a cost of $108,000. The
machine’s estimated useful life at the time of the purchase was five years, and its residual value
was $8,000.
Instructions
a. Prepare a complete depreciation schedule, beginning with calendar year 2008, under each of
the methods listed below (assume that the half-year convention is used):
1. Straight-line.
2. 200 percent declining-balance.
3. 150 percent declining-balance, switching to straight-line when that maximizes the expense.
b. Which of the three methods computed in part a is most common for financial reporting pur-
poses? Explain.
c. Assume that Swanson & Hiller sells the machine on December 31, 2011, for $28,000 cash.
Compute the resulting gain or loss from this sale under each of the depreciation methods used
in part a. Does the gain or loss reported in the company’s income statement have any direct
cash effects? Explain.
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