Question

A machine costing $210,800 with a four-year life and an estimated $20,000 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: 122,300 in Year 1, 123,700 in Year 2, 120,000 in Year 3, 121,000 in Year 4. The total number of units produced by the end of Year 4 exceeds the original estimate—this difference was not predicted. (The machine cannot 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

Ans. B	Units of production depreciation =
	Depreciation per unit =   (Cost of asset - Residual value) / Expected activity
	($210,800 - $20,000) / 477,000
	$190,800 / 477,000
	$0.40	per unit
	Depreciation = Activity * Depreciation per unit
	Year	Depreciable	Depreciation	Depreciation
		Units (a)	Per unit (b)	Expenses (a * b)
	1	$0.40	122300	$48,920
	2	$0.40	123700	$49,480
	3	$0.40	120000	$48,000
	4	$0.40	121000	$44,400
	Total			$190,800
	Depreciation expenses for fourth year will be calculated as follows:
	Accumulated depreciation upto three years ($48,920+$49,480+$48,000)   =   $146,400
	Book value at the end of 4 year must be equal to the salvage value (i.e. $20,000)
	Accumulated depreciation for total 4 years = Total cost - Book value at the end of 4 year
		$210,800 - $20,000   =   $190,800
	Depreciation for 4th year = Accumulated depreciation for 4 years - Accumulated depreciation for 3 years
			$190,800 - $146,400
			$44,400
Ans. C	Double declining balance method:
	Double declining balance depreciation rate = 2 * 1 / life of assets
		2 * 1 / 4
		50%
	*Depreciation = Remaining value at the beginning of the year * Double declining balance depreciation rate
		DDB Depreciation for the Period			End of Period
	Year	Beginning of period	Depreciation	Depreciation	Accumulated	Book
		Book value	Rate	Expenses (a * b)	Depreciation	Value
	1	$210,800	50%	$105,400	$105,400	$105,400
	2	$105,400	50%	$52,700	$158,100	$52,700
	3	$52,700	50%	$26,350	$184,450	$26,350
	4	$26,350		$6,350	$190,800	$20,000
	Total
	*In double declining balance method the book value at the end of year is the salvage value of the assets
	So, the depreciation expenses for the 4th year will be calculated as follows:
	Depreciation =   Beginning of period book value - Salvage value
		$26,350 - $20,000
		$6,350