Depreciation computations: change in estimate.
Aussie Imports purchased a specialized piece of machinery for $50,000 on January 1, 20X3. At the time of acquisition, the machine was estimated to have a service life of 5 years (25,000 operating hours) and a residual value of $5,000. During the 5 years of operations (20X3 – 20X7), the machine was used for 5,100, 4,800, 3,200, 6,000, and 5,900 hours, respectively.
a. Compute depreciation for 20X3 – 20X7 by using the following methods: straight line, units of output, and double-declining-balance.
b. On January 1, 20X5, management shortened the remaining service life of the machine to 20 months. Assuming use of the straight-line method, compute the company’s depreciation expense for 20X5.
c. Briefly describe what you would have done differently in part (a) if Aussie Imports had paid $47,800 for the machinery rather than $50,000 In addition, assume that the company incurred $800 of freight charges $1,400 for machine setup and testing, and $300 for insurance during the first year of use.