Question

PlasticWorks Corporation bought a machine at the beginning of the year at a cost of $15,500. The estimated useful life was five years, and the residual value was $2,500. Assume that the estimated productive life of the machine is 13,000 units. Expected annual production was: year 1, 4,000 units; year 2, 4,000 units; year 3, 2,500 units; year 4, 1,300 units; and year 5, 1,200 units.

Required:
1. Complete a depreciation schedule for each of the alternative methods. (Enter all values as positive amount.)

a. Straight-line.

b. Units-of-production.

c. Double-declining-balance.

2-a. Which method will result in the highest net income in year 2?

• Straight-line

• Units-of-production

• Double-declining-balance

2-b. Does this higher net income mean the machine was used more efficiently under this depreciation method?

• Yes

• No

Answer 1

Depreciation Schedule under:

a. Straight-line.

With the straight line depreciation method, the value of an asset is reduced uniformly over each period until it reaches its salvage value. It is calculated by simply dividing the cost of an asset, less its salvage value, by the useful life of the asset.

Computation of depreciation for each year:

Particulars		Machine
		$
Purchase Cost	A	15,500
Estimated Salvage value	B	2,500
Value to be depreciated in its useful life	C=A-B	13,000
Useful Life of Asset (in Years)	D	5
Depreciation value per year as per SLM	E=C/D	2,600

Hence, Depreciation each year will be as follows:

Year	Depreciation
	$
1	2,600
2	2,600
3	2,600
4	2,600
5	2,600

b. Units-of-production.

The units-of-production depreciation method is based on the assumption the asset will produce a fixed number of units over its lifetime; therefore, the depreciation expense in a given accounting period is directly related to the asset's production in that same accounting period.

Units-of-Production Depreciation = (Cost of Asset - Residual Value) / Total Units of production

Units-of-production Depreciation = ($15,500-$2,500)/13,000 units = $1 per unit

Depreciation Expense = Units of Output Depreciation x Units Produced

Hence, Depreciation each year will be as follows:

Year	Depreciation
	$
1	4,000
	(4,000 units*$1)
2	4,000
	(4,000 units*$1)
3	2,500
	(2,500 units*$1)
4	1,300
	(1,300 units*$1)
5	1,200
	(1,200 units*$1)

c. Double-declining-balance.

The double declining balance depreciation method counts depreciation expense more rapidly when compared to straight-line depreciation. The asset is depreciated till its value equals the residual value.

Double Declining rate = (100/Useful life)*2 = (100/5)*2 = 40%

Double Declining Depreciation = Net Book Value at the beginning of year * Double Declining rate

Hence, Depreciation each year will be as follows:

Year	Opening Book Value	Depreciation	Written Down Value
1	$15,500	$6,200	$9,300
		($15,500*40%)
2	$9,300	$3,720	$5,580
		($9,300*40%)
3	$5,580	$2,232	$3,348
		($5,580*40%)
4	$3,348	$848	$2,500
		($3,348*40%)
5	$2,500	$0	$2,500

2-a. Double-declining-balance will result in the highest net income in year 2 as the depreciation under Double-declining-balance is least among three methods. All the other values remaining same, the lesser the depreciation higher the net profit. Therefore, Double-declining-balance is the correct answer.

2-b No, the higher net income as in part 2-a does not mean the machine was used more efficiently under Double-declining-balance method of depreciation. Double Declining Method of depreciation is just another method of depreciation which assumes that the asset will be used at its maximum in the first year, little less in next year and so on. Hence, higher net income as in part 2-a does not mean the machine was used more efficiently under Double-declining-balance method of depreciation.