A machine costing $209,800 with a four-year life and an estimated $17,000 salvag

Question

A machine costing $209,800 with a four-year life and an estimated $17,000 salvage value is installed in Luther Company's factory on January 1. The factory manager estimates the machine will produce 482,000 units of product during its life. It actually produces the following units: 123,000 in 1st year; 124,200 in 2nd year; 120,300 in 3rd year; 124,500 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.)

Explanation / Answer

Depreciation calculation under Stright Line Method

Annual Depreciation = ($ 2,09,800 - $ 17,000)/4 = $ 48,200

Units of production

Depr per unit = ($ 2,09,800 - $ 17,000) / 4,82,000 = $ 0.40 per unit

Yr 1 depr = $ 0.40 x 123000 = $ 49,200
Yr 2 depr = $ 0.40 x 124200 = $ 49,680
Yr 3 depr = $ 0.40 x 120300 = $ 48,120

After 3 year, the accumulated depreciation is $ 1,47,000 and the net book value is $ 62,800

If we follow the above formula, we'd get Year 4 depreciation to be $ 49,800, but this would bring the net book value to $ 13,000, which is below the salvage value of $ 17,000, and this is not allowed.

So the depreciation for year 4 is limited to $ 62,800 - $ 17,000 = $ 45,800

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.