A machine costing $212,600 with a four-year life and an estimated $19,000 salvag
ID: 2555741 • Letter: A
Question
A machine costing $212,600 with a four-year life and an estimated $19,000 salvage value is installed in Luther Company's factory on January 1. The factory manager estimates the machine will produce 484,000 units of produ during its life. It actually produces the following units: 122,400 in 1st year, 123,400 in 2nd year, 120,400 in 3rd year 127,800 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 neare whole dollar.) Complete this question by entering your answers in the tabs below. Units of Straight LineProduction Compute depreciation for each year (and total depreciation of all years combined) for the machine under each Straigh depreciation Straight-Line Depreciation Year Depreciation Expense 4 TotalExplanation / Answer
Solution:
Part 1 – Depreciation Expenses each year using straight line method
Straight Line Method
Straight line method is a method of calculating depreciation of an asset.
Under this method depreciation is calculated by dividing depreciable asset value by estimated useful life.
Depreciable Asset Value = Cost of Asset – Salvage Value
In this method, depreciation for each year remains same.
Mathematically,
Annual Depreciation = (Cost of Asset – Salvage Value) / Useful life
Annual Depreciation Expense = (Cost of Asset $212,600 - $19,000) / 4 = $48,400
Straight Line Depreciation
Year
Depreciation Expense
1
$48,400
2
$48,400
3
$48,400
4
$48,400
Total
$193,600
Part 2 – Depreciation Expenses for each year using Units of Production method
Under the Units of Production method of depreciation, depreciation is charged according to the actual usage of the asset. Higher depreciation is charged when there is higher activity and less is charged when there is low level of operation. Zero depreciation is charged when the asset is idle for the whole period.
Estimated production Units during life of machine = 484,000 Units
Machine’s Depreciable Cost = Cost of Asset – Salvage Value = $212,600 - $19,000 = $193,600
Under the units of production method, the machine's depreciable cost of $193,600 is divided by 484,000 Units, resulting in depreciation of $0.40 per unit.
Units of Production Method
Year
Depreciable Units (Actual Units Produced)
Depreciation Rate per Unit
Depreciation Expenses
1
122400
$0.40
$48,960
2
123400
$0.40
$49,360
3
120400
$0.40
$48,160
4
127800
$0.40
$0.3687
$51,120
$47,120
Total
494000
$193,600
Although we calculated Year-4 depreciation $51,120 that would drop the book value of asset. Therefore, in the Year 4, the depreciation is limited to $47,120.
Part 3 – DDB Depreciation (Double Declining Balance)
It is a method of depreciation used by the companies when they want to quickly depreciate an asset.
The asset will depreciate much faster under this method than straight-line because we double the percentage that would be depreciated each year under straight-line.
Salvage value is not subtracted from Cost of Asset when depreciation is calculated by using this method.
The formula for double declining balance is:
Annual depreciation = Book Value * 100% / life * 2
Calculate the percentage that should be used first.
Percentage = 100% / Useful Life x 2
Once the percentage is calculated, it is the same for the rest of the asset’s life.
Year
DDB Depreciation for the period
End of Period
Beginning of period book value
Depreciation Rate
Depreciation Expenses
Accumulated Depreciation
Book Value
1
212,600
50.00%
106,300
106,300
106,300
2
106,300
50.00%
53,150
159,450
53,150
3
53,150
50.00%
26,575
186,025
26,575
4
26,575
50.00%
13,288
$7,575
193,600
$19,000
193,600
Note --- The annual depreciation for Year 4 is more than the amount of remaining depreciation we are allowed to take on the asset. Therefore, we cannot take the full amount of depreciation calculated. Instead, we are limited to $7,575 in Year 4.
Straight Line Depreciation
Year
Depreciation Expense
1
$48,400
2
$48,400
3
$48,400
4
$48,400
Total
$193,600
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