A machine costing $212,200 with a four-year life and an estimated $15,000 salvag

Question

A machine costing $212,200 with a four-year life and an estimated $15,000 salvage value is installed in Luther Company's factory on January 1. The factory manager estimates the machine will produce 493,000 units of product during its life. It actually produces the following units: 122,300 in 1st year, 123,700 in 2nd year, 120,500 in 3rd year, 136,500 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. Units of Straight Line Production DDB

Explanation / Answer

1.Straight line depreciation:

Cost of the machine = $212,200

Useful life = 4 years , Salvage value = $15,000

Depreciation for year 1 = (Cost - Salvage value) / Useful life = ( $212200 - $15000 ) / 4 = $49,300

Depreciation is same for all the remaining 3 years.

Total depreciation for all years combined = $49,300 x 4 years = $197,200

2.Units of Production method:

Depreciation per unit = (Cost – Salvage value) / Estimated units of production

= ($212,200 – $15,000) / 493,000

= $197,200 / 493,000

= $0.40

This rate is to be multiplied with actual units produced in the year.

During year 4, depreciation expense is restricted to $50,600 [197200 - (48920 +49480 + 48200) ] because book value after charging total depreciation for 4 years should not go beyond salvage value,$15000

3.Double declining balance method:

Under DDB method, depreciation rate = [1 / useful life] x 2 = [1 / 4] x 2 = 0.5 = 50%

Depreciation expense for year 4 is restricted to $11,525 to make sure that book value does'nt fall below salvage value,$15,000.

Year Depreciable units Depreciation per unit Depreciation Expense 1 122300 0.40 48920 2 123700 0.40 49480 3 120500 0.40 48200 4 136500 0.40 50600 Total 503000 197200

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