Question

A heavy construction firm has been awarded a contract to build a large concrete dam. It is expected that a total of 8 years will be required to complete the work. The firm will buy $600,000 worth of special equipment for the job. During the preparation of the job cost estimate, the following utilization schedule was computed for the special equipment:

Year Utilization (hr/yr)
1 6000
2 4000
3 4000
4 1600
5 800
6 800
7 2200
8 2200

At the end of the job, it is estimated that the equipment can be sold at auction for $60,000.

a. Compute the sum-of-years-digits' depreciation schedule.
b. Compute the unit-of-production depreciation schedule

Answer 1

Answer:

Heavy Construction Firm

a. Sum-of-years-digits' Depreciation Schedule

Year           Cost             Depreciation   Accumulated    Net Book Value

                                          Expense       Depreciation

Year 1      $600,000       $120,000         $120,000          $480,000

Year 2     $600,000       $105,000        $225,000          $375,000

Year 3     $600,000        $90,000         $315,000          $285,000

Year 4     $600,000        $75,000        $390,000           $210,000

Year 5    $600,000        $60,000        $450,000           $150,000

Year 6    $600,000        $45,000        $495,000           $105,000

Year 7    $600,000        $30,000        $525,000            $75,000

Year 8   $600,000         $15,000         $540,000           $60,000

b. The Unit-of-Production Depreciation Schedule

Year           Cost             Depreciation   Accumulated    Net Book Value

                                          Expense       Depreciation

Year 1      $600,000       $150,000         $150,000          $450,000

Year 2     $600,000       $100,000        $250,000          $350,000

Year 3     $600,000       $100,000        $350,000          $250,000

Year 4     $600,000        $40,000        $390,000           $210,000

Year 5    $600,000        $20,000         $410,000           $190,000

Year 6    $600,000        $20,000        $430,000           $170,000

Year 7    $600,000        $55,000        $485,000            $115,000

Year 8   $600,000        $55,000         $540,000           $60,000

Explanation:

a) Data and Calculations:

Cost of special equipment for the dam construction = $600,000

Estimated useful life = 8 years

Salvage value of equipment = $60,000

Depreciable amount = $540,000 ($600,000 - $60,000)

Sum-of-the-years-digit = 36 (8 + 7 + 6 + 5 + 4 + 3 + 2 + 1)

Utilization Schedule for the Special Equipment:

Year Utilization (hr/yr)  Unit of Production                SYD Depreciation

1               6000                $150,000 (6,000 * $25)   $120,000 (8 * $15,000)

2              4000                $100,000 (4,000 * $25)   $105,000 (7 * $15,000)

3              4000                $100,000 (4,000 * $25)    $90,000 (6* $15,000)  

4              1600                  $40,000 (1,600 * $25)     $75,000 (5 * $15,000)

5               800                  $20,000 (800 * $25)       $60,000 (4 * $15,000)

6               800                  $20,000 (800 * $25)       $45,000 (3 * $15,000)

7            2200                  $55,000 (2,200 * $25)    $30,000 (2 * $15,000)

8            2200                  $55,000 (2,200 * $25)    $15,000 (1 * $15,000)

Total   21,600 hours

Depreciation rate per hour = $25 ($540,000/21,600)

Sum-of-the-years-digits depreciation rate = $15,000 ($540,000/36)