Question

5. A machine was acquired on January 1, 2018, at a cost of $80,000. The machine was originally estimated to have a residual value of $5,000 and an estimated life of 5 years. The machine is expected to produce a total of 100,000 components during its life, as follows: 15,000 in 2018, 20,000 in 2019, 20,000 in 2020, 30,000 in 2021, and 15,000 in 2022. (25 marks)

Instructions

(a)   Calculate the amount of depreciation to be charged each year, using each of the following methods (22 marks):

       1.    Straight-line method

       2.    Units-of-production

       3.    Double diminishing-balance

(b)   Which method results in the highest depreciation expense during the first two years? Over all five years? (3 marks)

Answer 1

(a) (1) Depreciation under Straight line method = (Cost - Residual value) / Estimated useful life

= ($80,000 - $5,000) / 5

= $15,000

2018	$15,000
2019	$15,000
2020	$15,000
2021	$15,000
2022	$15,000

(2) Depreciation rate per component = (Cost - Salvage value) / Total expected components

= ($80,000 - $5,000) / 100,000

= $0.75

Depreciation under units of production method = Components produced in the year * Depreciation rate per component

2018	$11,250 (15,000*$0.75)
2019	$15,000 (20,000*$0.75)
2020	$15,000 (20,000*$0.75)
2021	$22,500 (30,000*$0.75)
2022	$11,250 (15,000*$0.75)

(3) Depreciation under double diminishing method = (Cost - Accumulated depreciation) / Useful life * 2

2018	$32,000 [($80,000-$0)/5*2]
2019	$19,200 [($80,000-$32,000)/5*2]
2020	$11,520 [($80,000-$32,000-$19,200)/5*2]
2021	$6,912 [($80,000-$32,000-$19,200-$11,520)/5*2]
2022	$4,147 [($80,000-$32,000-$19,200-$11,520-$6,912)/5*2]

* Depreciation in Year 2022 is rounded to 0 decimal places.

(b)

Double diminishing balance method results in highest depreciation expense during the first two years.

Straight-line and units of production methods results in highest depreciation overall.