Question

IV. Plant, Property & Equipment (LLS 8) Lannister Inc. purchased a machine at the beginning of 2019 for $120,000. Lannister Inc. incurred $2,000 in installation charges. Cersei, the President of Lannister Inc., estimates that the machine will last 6 years or can be used to produce 30,000 units of production. Cersei expects the residual value to be $5,000. 2019 2020 S/L Usage DDB 3 pts 3 pts 4 pts Required: In 2019 and 2020, Lannister Inc. produced 8,000 units and 5,500 units, respectively. Determine the depreciation expense for 2019 and 2020, assuming (a) the Straight Line Method; (b) the Usage Method; and, (c) Double Declining Method. Be sure to show your work.

Answer 1

The answer is below:

Method	2019	2020
Straight Line	$19,500.00	$19,500.00
Usage	$31,200.00	$21,450.00
DDB	$40,666.67	$27,111.11

Cost = $120,000+$2,000 = $122,000

Residual value = $5,000

depreciable base = 122,000-5,000 = $117,000

Life=6 years

Total units = 30,000

SLM rate of depreciation is 100/6 = 16.67% (on the depreciable base). [i.e: 2019 & 2020 = 117,000 x 16.67%]

Usage is fairly simple, divide the depreicable base to total units multiply by the number of units produced in that year. [i.e for 2019 = (117,000/30000) x 8000, for 2020 = (117,000/30000) x 5500]

DDB is nothing but double the rate of SLM, i.e 33.33%, however it is to be applied on the book value i.e for 2019 = 122,000 x 33%, for 2020 = (122,000 - 40,666.67) x 33.33%, unit the book value is equal to the residual value (i.e 5,000).