Question

On January 1, 2018 Friendly Farm Company purchased a new machine at a cost of $350,000. The machine has an estimated useful life of 4 years or 100,000 hours and residual value of $30,000. The machine will be used 30,000 hours in year 1, 40,000 hours in year 2, 20,000 hours in year 3 and 10,000 hours in year 4.

Requirements:

Prepare a depreciation schedule using each of the three methods: Straight line, Units of Production and Double Declining Balance.

Answer 1

Straight-Line Depreciation Method:

Cost of Machine = $350,000
Salvage Value = $30,000
Useful Life = 4 years

Depreciable Cost = Cost of Machine - Salvage Value
Depreciable Cost = $350,000 - $30,000
Depreciable Cost = $320,000

Annual Depreciation = Depreciable Cost / Useful Life
Annual Depreciation = $320,000 / 4
Annual Depreciation = $80,000

Straight-Line Depreciation Depreciation Year Expense 80000 2 80000 80000 80000 320000

Units of Production Depreciation Method:

Depreciable Cost = $320,000
Useful Life = 100,000 units

Depreciation per unit = Depreciable Cost / Useful Life
Depreciation per unit = $320,000 / 100,000
Depreciation per unit = $3.20

Year Units of Production Depreciable Depreciation Units per unit 30000 3.20 40000 3.20 20000 3.20 10000 3.20 100000 Depreciation Expense 96000 128000 64000 32000 320000 Total

Double-Declining-Balance Depreciation Method:

Double-Declining-Balance Depreciation Rate = 2 / Useful Life
Double-Declining-Balance Depreciation Rate = 2 / 4
Double-Declining-Balance Depreciation Rate = 50%

End of Period Year Accumulated Depreciation Book Value DDB Depreciation for the Period Beginning of Depreciation Depreciation Period Book Rate Expense Value 350000 50% 175000 175000 50% 87500 87500 50% 43750 43750 13750 320000 PWN 175000 262500 306250 320000 175000 87500 43750 30000 Total