Question

A machine costing $214,000 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 490,000 units of product during its life. It actually produces the following units: 122,400 in 1st year, 124,300 in 2nd year, 120,700 in 3rd year, 132,600 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.)

Answer 1

1. Straight Line Method
Year	Depreciation
1	$49,000
2	$49,000
3	$49,000
4	$49,000
Workings:
Depreciation = (Cost of Machine - Salvage Value) / Useful life of the Machine
= ($214,000 - $18,000 ) / 4 years
=$49,000

2. Units of production method
Year	Depreciation units	Depreciation per unt	Depreciation
1	122400	$0.40	$48,960
2	124300	$0.40	$49,720
3	120700	$0.40	$48,280
4	132600	$0.40	$53,040
Workings:
Depreciation = (Cost of Machine - Salvage Value) / Total Units
= ($214,000 - $18,000 ) / 490000
Depreciation = $0.40 per unit

3. Double Declining method
Year	Beginning book value (A)	Depreciation Rate (B)	Depreciation Expenses (C = A *B)	Accumulated Depreciation (D )	Book Value (E = $214,000 - D)
1	$214,000	50%	$107,000	$107,000	$107,000
	(Given)		($214,000 * 50%)
2	$107,000	50%	$53,500	$160,500	$53,500
	($214,000 - $107,000)		($107,000* 50%)	($107,000 + $53,000)
3	$53,500	50%	$26,750	$187,250	$26,750
	($214,000 - $160,500		($53,500* 50%)	($160,500 + $26,750)
4	$26,750	50%	$8,750	$196,000	$18,000
	($214,000 - $187,250		($26,750* 50%)	($187,250 + $13,375)	(Salvage Value)
Workings:
Depreciation Rate = (1 / Useful life of machine) * 2
=( 1 / 4) * 2
Depreciation Rate =50 %