On April 1 of the current year, a company purchased and placed in service a mach

Question

On April 1 of the current year, a company purchased and placed in service a machine with a cost of $240,000. The company estimated the machine’s useful life to be four years or 60,000 units of output with an estimated salvage value of $60,000. During the current year, 12,000 units were produced.

a. The straight-line method of depreciation

b. The units-of-production method of depreciation

Calculate depreciation expense using each of the following methods. (SHOW YOUR WORK)

a. The straight-line method of depreciation

b. The units-of-production method of depreciation

c. The double-declining balance method of depreciation

Explanation / Answer

Depreciation expense for 1st year is as follows.

(a) Straight-line method (SLM) annual depreciation ($) = (Cost - Salvage value) / Useful life = (240,000 - 60,000) /4

= 180,000 / 4 = 45,000

(b) Annual depreciation ($) = (Cost - Salvage value) x (Units produced in year 1 / Lifetime units produced)

= (240,000 - 60,000) x (12,000 / 60,000) = 180,000 x (1/5) = 36,000

(c) SLM depreciation rate = 1 / Useful life = 1 / 4 = 0.25

DDB Depreciation rate = 2 x SLM rate = 2 x 0.25 = 0.5

Annual depreciation in year 1 ($) = Cost** x DDB Depreciation rate = 240,000 x 0.5 = 120,000

**DDB method ignores salvage value.

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