with a for year ne ant an estimated S 16 ? O savage vaue is installed in Luther

Question

with a for year ne ant an estimated S 16 ? O savage vaue is installed in Luther company's tactory on January 1 The factory manager estimates the machie i duce 495 000 units of pr duct du g its life. It actually produces the fol0wing units 121,800 i 1st year, 123,800 in 2nd year, 120 200 r 3rd year, 139 200 ? 4th year The total num er of A macme costru sn 4 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 )

Explanation / Answer

1. Depreciation as per straight line method = (cost – salvage value)/life

= (214000-16000)/4

= $49500 per year

2. Depreciation per unit = (cost - salvage value)/total production estimate = (214,000-16,000)/495,000 = $0.40 per unit

Depreciation expense = depreciation per unit*depreciable units

Thus depreciation for year 1 = 121800*0.40 = $48720. Similarly depreciation for years 2 and 3 are computed.

The amount of depreciation in 4th year = total amount to be depreciated - sum of depreciation in years 1 to 3

= 198,000 - (48720-49520-48080)

= 51680

Now depreciable units for 4th year = depreciation amount/depreciation per unit = 51680/0.4 = 129,200 units

The figures are shown below:

3. DDB method or double declining method:

Straight line rate = 100%/4 = 25%. Thus double declining rate = 25%*2 = 50%

In the 4th year the rate of depreciation will not be 50%. It will be the balance amount so that salvage value of 16,000 is reached.

Thus depreciation in 4th year = 26750 (start of the year balance) - 16000 (salvage value) = $10,750

Year Depreciation expense 1 49,500 2 49,500 3 49,500 4 49,500 Total 198,000

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