Redstorm Company purchased a new machine on January 1, 20X1, at a cost of $150,0
ID: 2765512 • Letter: R
Question
Redstorm Company purchased a new machine on January 1, 20X1, at a cost of $150,000. The machine is expected to have an eight-year life and a $15,000 salvage value. The machine is expected to produce 675,000 finished products during its eight-year life. Production during 20X1 was 70,000 units and during 20X2 110,000 units Required: Determine the amount of depreciation expense to be recorded on the machine for the years 20X1 and 20X2 under each of the following methods:
20X1 20X2
(1.) Straight-line ________ ________
(2.) Units of production method ________ ________
(3.) Double-declining-balance ________ ________
Explanation / Answer
Straight line method
Depreciation per annum = Cost of assets – salvage value/ life of assets
= $ 150,000 - $ 15,000/8
= $135,000/8
= $ 16,875
Unit of production method
Depreciation per unit = Cost of assets – salvage value /Total no of units expected to produce
= $ 150,000 - $ 15,000/ 675,000
= $ 135,000/675,000
= $ 0.20
Depreciation
For 2011 = 0.02 x 70,000 = $ 14,000
For 2012 = 0.02 x 110,000 = $ 22,000
Double decline method
Depreciation % under straight line method = 1/ 8 years = 12.5 %
Depreciation under double decline method
= 2 x straight line depreciation %
= 2 x 12.5 % = 25 %
Depreciation
For 2011 = 150,000 x 25 % = $ 37,500
For 2012 = (150,000 – 37,500) x 25 % = $ 28,125
Depreciation
Method
2011
2012
1
Straight line Method
16,875
16,875
2
Units of Production Method
14,000
22,000
3
Double Declining Method
37,500
28,125
Depreciation
Method
2011
2012
1
Straight line Method
16,875
16,875
2
Units of Production Method
14,000
22,000
3
Double Declining Method
37,500
28,125
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