Question

A machine costing $215,600 with a four-year life and an estimated $18,000 salvage value is installed in Luther Company's factory on Jan 1st. The factory manager estimates the machine will produce 494,000 units of product during it's life. It actually produces the following units: 123,000 in year 1, 124,100 in year 2, 120,300 in year 3, 136,600 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.)

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 the Units of production. Uhits of Production Depreciable Depreciation Depreciation Units Expense Year Units per unit 123,000 124,100 2 120 300 136.600 $ 0 Total < Straight Line DDB

Answer 1

a. Calculation of Depreciation using Straight line method :

Depreciation Expense = ( Purchase Cost - Estimated Salvage Value ) / Estimated Useful life

= ( $ 215,600 - $ 18,000 ) / 4 years

= $ 49,400 per year

Machine purchased on January 1, & thus it was use in business for entire year.

Straight line depreciation expenses per annum is same over the useful of life of asset.

Thus, Depreciation expense for every year is $ 49,400

b, Units of production :

Year	Units	Depreciaable units	Depreciation per unit	Depreciation expense
1	1,23,000	1,23,000	$                           0.40	$                        49,200
2	1,24,100	1,24,100	$                           0.40	$                        49,640
3	1,20,300	1,20,300	$                           0.40	$                        48,120
4	1,36,600	1,26,600	$                           0.40	$                        50,640
Total		4,94,000		$                    1,97,600

Depreciation rate = ( Purchase Cost - Estimated Salvage Value ) / Total estimated production

= ( $ 215,600 - $ 18,000 ) / 494,000 units

= $ 0.40 per unit

Total maximum depreciation can be purchase cost less of salvage value

= $ 215600 - $ 18000 = $ 197,600

Maximum number of uits depreciable = Total maximum depreciation / Depreciation rate per unit

= $ 197,600 / $ 0.40

= 494,000

Actual produced units = 123000 + 124100 + 120300 + 136600 = 504,000

Thus, Excess units produced is 504,000 - 494000 = 10,000

Thus, Year 4 depreciable units = 136600 - 10,000 = 126,600

c.Double-declining balance method :

Year	Beginning of Period Book Value	Depreciation Rate (Working Note)	Depreciation Expense	Accumulated Depreciation	Book Value
(i)	(ii)	(iii)	(iv)[(ii)*(iii)]	(v)	(vi)[(ii)-(iv)]
1	$   2,15,600	50%	$    1,07,800	$     1,07,800	$                1,07,800
2	$   1,07,800	50%	$        53,900	$     1,61,700	$                   53,900
3	$      53,900	50%	$        26,950	$     1,88,650	$                   26,950
4	$      26,950	33.21%	$          8,950	$     1,97,600	$                   18,000
Total			$    1,97,600

In year 4, we have taken depreciation $ 8,950 as difference between Beginning of period book value and salvage value ( $ 26,950 - $ 18,000 ) as Ending book value can not be less than salvage value. Therefore depreciation rate is changed.

Depreciation rate for year 4 = Depreciation expense / Beginning of period book value

= $ 8,950 / $ 26,950

= 33.21% (rounded off to two decimal places)

Working Note:

Calculation of Rate of Depreciation under Double declining balance method is as follows:

Rate of Depreciation under Double declining balance method = 2 * Depreciation rate

= 2 * 25

= 50%

Thus, Rate of Depreciation under Double declining balance method is 50%

Depreciation Rate = (1 / Estimated Useful life) * 100

= ( 1/ 4 ) * 100

= 25 %