Question

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Problem 10-2A Depreciation methods LO P1 A machine costing $208,800 with a four-year life and an estimated $18,000 salvage value is installed in Luther Company's factory on January 1. The factory manager estimates the machine will produce 477,000 units of product during its life. It actually produces the following units: 122,400 in 1st year, 124,100 in 2nd year, 120,400 in 3rd year, 120,100 in 4th year. The total number of units produced by the end of year 4 exceeds the original estimate-this difference was not predicted. (The machine must not be depreciated below its estimated salvage value.) Required: Compute depreciation for each year (and total depreciation of all years combined) for the machine under each depreciation method. (Round your per unit depreciation to 2 decimal places. Round your answers to the nearest whole dollar.) Complete this question by entering your answens in the tabs below. Units of Straight Line DDB Production Compute depreciation for each year (and total depreciation of all years combined) for the machine under each Units of production. Units of Production Depreciable Deoreciation Deoreciation <Prev 1 of 4

Answer 1

a. Under the straight line method, depreciation is calculated by the following formula:

Depreciation = Cost - Salvage value / Useful life

Cost = $208800, Salvage value = $18000, useful life = 4

Depreciation = ($208800 - $18000) / 4 = $47700

Under straight line method, depreciation remains the same for every year. So depreciation for all the years will be $47700.

Year	Depreciation expense
1	47700
2	47700
3	47700
4	47700
Total	190800

b. Under units of production method, first we will calculate the depreciation per unit and then we will calculate the depreciation expense.

Depreciation per unit = Cost - Salvage value / Estimated units

Estimated units = 477000

Rate per unit = ($208800 - $18000) / 477000 = $190800 / 477000 = $0.4 per unit

In the next step, we will compute the depreciation expense as per below:

Depreciation expense = Depreciation per unit * No. of units produced

Year	Depreciable units	Depreciation per unit	Depreciation expense
1	122400	$0.4	$48960
2	124100	$0.4	$49640
3	120400	$0.4	$48160
4	120100	$0.4	$44040
Total	487000		$190800

Machine cannot be depreciated below its salvage value. So, machine will be depreciated till the amount of $190800 (i.e. $208800 - $18000). So, depreciation in 4th year will be the amount as reduced by the sum of the depreciation charged for first 3 years. Depreciation in 4th year will thus be $44040 (i.e $190800 - $48960 - $49640 - $48160).

c. Under double declining balance method, depreciation is calculated by the following formula:

Depreciation rate = 2 * 1 / N

where, n is the no. of years or useful life

Depreciation rate = 2 * 1 / 4 = 50%

Year	Beginning period book value	Depreciation rate	Depreciation expense	Accumulated depreciation	End of period book value
1	208800	50%	104400	104400	104400
2	104400	50%	52200	156600	52200
3	52200	50%	26100	182700	26100
4	26100	50%	8100	190800	18000

Machine cannot be depreciated below its salvage value. So, machine will be depreciated till the end of the period book value reaches salvage value amount of $18000. So, depreciation in 4th year will be the amount that will make accumulated depreciation equal to $190800. Depreciation in 4th year will thus be $8100.