Question

A machine costing $216,600 with a four-year life and an estimated $19,000 salvage value is installed in Luther Company's factory on January 1. The factory manager estimates the machine will produce 494,000 units of product during its life. It actually produces the following units: 121,700 in 1st year, 123,000 in 2nd year, 121,500 in 3rd year, 137,800 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 answers in the tabs below. Straight Line Units of Production DDB Compute depreciation for each year (and total depreciation of all years combined) for the machine under Straight-line depreciation Straight-Line Depreciation Depreciation Year Expense Units of Production >

Answer 1

Answer

Straight Line Method

Depreciation Expense per year = (Cost – Salvage Value) / No. of Years

= ($216,600 – 19,000) / 4 Years

Depreciation Expense = $49,400 Per Year

Year	Depreciation
1	49,400.00
2	49,400.00
3	49,400.00
4	49,400.00
Total	197,600.00

Units of Production

Depreciable cost = $197,600 ($216,600 – 19,000)

Depreciation per unit = Depreciable cost / No. of Units

= $197,600 / 494,000 Units         

Depreciation per unit = $0.4 per unit

Year	Depreciable units	Depreciation per Unit	Depreciation
1	121,700.00	0.40	48,680.00 (121,700 * $0.4)
2	123,000.00	0.40	49,200.00 (123,000 * $0.4)
3	121,500.00	0.40	48,600.00 (121,500 * $0.4)
4	137,800.00	0.40	51,120.00 (*)
Total	504,000.00		197,600.00

Note

In 4^th year there will be some issue as no. of units produced is more than estimated and, in the question, it is mentioned that depreciation cannot be more than depreciable cost (i.e. Machine must not be depreciated below the salvage value i.e. Depreciable cost)

So in 4^th year depreciation will be depreciable cost less the value of asset which is already depreciated i.e. all 3 years depreciation

Depreciation for 4^th year = Depreciable cost – Depreciation for all 3 years

= $197,600 - $146,480 (48,680 + 49,200 + 48,600)

Depreciation for 4^th year = $51,120

DDB Method

Depreciation Rate = 25% (100/ 4 Years)

In double declining method, rate of depreciation will be 50% (25% * 2)

Date	Asset Cost	Depreciable Cost	Book Value	Depreciation Rate	Depreciation Expense	Accumulated Depreciation
Beginning Year 1	216,600		216,600
End 1		216,600	108,300	50%	108,300	108,300
End 2			54,150	50%	54,150	162,450
End 3			27,075	50%	27,075	189,525
End 4			19,000	50%	8,075 (Note)	197,600
Total					197,600

Note

In 4^th year there will be some issue as Depreciation is more as it will result in machine value less than salvage value and in the question, it is mentioned that depreciation cannot be more than depreciable cost (i.e. Machine must not be depreciated below the salvage value i.e. Depreciable cost)

So in 4^th year depreciation will be depreciable cost less the value of asset which is already depreciated i.e. all 3 years depreciation

Depreciation for 4^th year = Depreciable cost – Depreciation for all 3 years

= $197,600 - $189,525

Depreciation for 4^th year = $8,075

Dear Student, if u have any query please feel free to reach me.