On October 1, Organic Farming purchases wind turbines for $150,000. The wind turbines are expected to last five years, have a salvage value of $21,000, and be depreciated using the straight-line method. 1. Compute depreciation expense for the last three months of the first year. 2. Compute depreciation expense for the second year.
1. To compute depreciation expense for the last three months of the first year, we first need to determine the depreciation per month.
The yearly depreciation can be calculated by subtracting the salvage value from the cost and dividing it by the useful life:
Depreciation = (Cost - Salvage value) / Useful life
Depreciation = ($150,000 - $21,000) / 5
Depreciation = $129,000 / 5
Depreciation = $25,800 per year
To find the monthly depreciation, divide the yearly depreciation by 12:
Monthly depreciation = $25,800 / 12
Monthly depreciation = $2,150
Since we are calculating depreciation for the last three months of the first year, multiply the monthly depreciation by three:
Depreciation expense for the last three months of the first year = $2,150 * 3
Depreciation expense for the last three months of the first year = $6,450
2. The depreciation expense for the second year is the same as the yearly depreciation:
Depreciation expense for the second year = $25,800
To compute the depreciation expense for the last three months of the first year, we need to determine the monthly depreciation expense and multiply it by the remaining months (three months).
Step 1: Calculate the total depreciation over the useful life of the wind turbines.
Depreciation expense = (Purchase cost - Salvage value) / Useful life
Depreciation expense = ($150,000 - $21,000) / 5 years
Depreciation expense = $129,000 / 5 years
Depreciation expense = $25,800 per year
Step 2: Determine the monthly depreciation expense.
Monthly depreciation expense = Annual depreciation expense / 12 months
Monthly depreciation expense = $25,800 / 12 months
Monthly depreciation expense ≈ $2,150 per month
Step 3: Compute the depreciation expense for the last three months of the first year.
Depreciation expense for the last three months = Monthly depreciation expense * Remaining months
Depreciation expense for the last three months = $2,150 * 3 months
Depreciation expense for the last three months = $6,450
Therefore, the depreciation expense for the last three months of the first year is $6,450.
To compute the depreciation expense for the second year, we need to calculate the annual depreciation expense using the straight-line method.
Step 1: Determine the annual depreciation expense.
Annual depreciation expense = (Purchase cost - Salvage value) / Useful life
Annual depreciation expense = ($150,000 - $21,000) / 5 years
Annual depreciation expense = $129,000 / 5 years
Annual depreciation expense = $25,800 per year
Therefore, the depreciation expense for the second year is $25,800.