The ABC Company purchased a solar powered electrical generator on March 9, 2005 for $1.5 million. At that time, it was estimated that the generator would have a useful life of 20 years and a salvage value of $50,000. Over its life span, it was estimated that the generator would produce 30M gigawatts of electricity. In the 2005 year, the generator produced 800,000 gigawatts; in the 2006 year – 1.2M gigawatts, and finally in the 2007 year – 1.0M gigawatts (i.e. 500,000 gigawatts up to July 17).
On July 17, 2007, during a management meeting, the senior engineer notified the Controller that there were actually 35 years of useful life remaining on the generator (or 35M gigawatts of electricity) now that a $300,000 retrofit had been completed. In addition, the engineer stated that the generator would likely have a salvage value of only $10,000. After further research, the Controller agreed with the engineer’s stated information and realized that a “change of accounting estimate”, in respect of the amortization expense, would be required.
ABC Company has a calendar year end. Use nearest whole month method.
Required:
Prepare a table showing Capital Cost, Accumulated Amortization, Net Book Value, and Amortization Expense for 2005, 2006, and 2007 using the following methods:
a) Straight line
b) Units of production
c) Double declining balance
To prepare the table showing Capital Cost, Accumulated Amortization, Net Book Value, and Amortization Expense for 2005, 2006, and 2007 using different depreciation methods, we need to follow the steps for each method. Let's go through each method one by one.
a) Straight Line Depreciation Method:
The straight-line method allocates the cost of the asset evenly over its useful life.
Step 1: Calculate the annual depreciation expense
Annual Depreciation Expense = (Initial Cost - Salvage Value) / Useful Life
Step 2: Calculate the accumulated depreciation for each year
Accumulated Depreciation = Depreciation Expense * Number of Years
Step 3: Calculate the net book value for each year
Net Book Value = Initial Cost - Accumulated Depreciation
Step 4: Prepare the table
Using the given information, we can calculate the table for the years 2005, 2006, and 2007:
| Year | Capital Cost | Accumulated Amortization | Net Book Value | Amortization Expense |
|----------|-------------------|-------------------------|--------------------|----------------------|
| 2005 | $1,500,000 | $0 | $1,500,000 | $75,000 |
| 2006 | $1,500,000 | $75,000 | $1,425,000 | $75,000 |
| 2007 | $1,500,000 | $150,000 | $1,350,000 | $75,000 |
b) Units of Production Depreciation Method:
The units of production method allocates the cost of the asset based on the actual usage or production.
Step 1: Calculate the depreciation rate per unit of production
Depreciation Rate = (Initial Cost - Salvage Value) / Total Estimated Production
Step 2: Calculate the depreciation expense for each year based on the actual production
Depreciation Expense = Depreciation Rate * Actual Production
Step 3: Calculate the accumulated depreciation for each year
Accumulated Depreciation = Depreciation Expense * Number of Years
Step 4: Calculate the net book value for each year
Net Book Value = Initial Cost - Accumulated Depreciation
Step 5: Prepare the table
Using the given information and actual production, we can calculate the table for the years 2005, 2006, and 2007:
| Year | Capital Cost | Accumulated Amortization | Net Book Value | Amortization Expense |
|----------|-------------------|-------------------------|--------------------|----------------------|
| 2005 | $1,500,000 | $0 | $1,500,000 | $0 |
| 2006 | $1,500,000 | $750,000 | $750,000 | $300,000 |
| 2007 | $1,500,000 | $1,500,000 | $0 | $250,000 |
c) Double Declining Balance Depreciation Method:
The double declining balance method allocates a higher depreciation expense in earlier years and lower in later years.
Step 1: Calculate the depreciation rate
Depreciation Rate = 2 / Useful Life
Step 2: Calculate the annual depreciation expense
Depreciation Expense = Book Value * Depreciation Rate
Step 3: Calculate the book value for each year
Book Value = Initial Cost - Accumulated Depreciation
Step 4: Calculate the accumulated depreciation for each year
Accumulated Depreciation = Accumulated Depreciation + Depreciation Expense
Step 5: Calculate the net book value for each year
Net Book Value = Initial Cost - Accumulated Depreciation
Step 6: Prepare the table
Using the given information, we can calculate the table for the years 2005, 2006, and 2007:
| Year | Capital Cost | Accumulated Amortization | Net Book Value | Amortization Expense |
|----------|-------------------|-------------------------|--------------------|----------------------|
| 2005 | $1,500,000 | $0 | $1,500,000 | $300,000 |
| 2006 | $1,500,000 | $300,000 | $1,200,000 | $360,000 |
| 2007 | $1,500,000 | $660,000 | $840,000 | $252,000 |
Note: In 2007, the calculation is based on the revised useful life of 35 years and salvage value of $10,000.
This table shows the Capital Cost, Accumulated Amortization, Net Book Value, and Amortization Expense for each method (Straight Line, Units of Production, and Double Declining Balance) for the years 2005, 2006, and 2007.