Question

Duluth Ranch, Inc. purchased a machine on July 1, 2018. The cost of the machine was $34,000. Its estimated residual value was $10,000 at the end of an estimated 5-year life. The company expects to produce a total of 20,000 units. The company produced 2,500 units in 2018 and 3,200 units in 2019.

Required:

Part A - Calculate depreciation expense for 2018 and 2019 using the straight-line method.

Part B - Calculate the depreciation expense for 2018 and 2019 using the units-of-production method.

Answer 1

Part A: Straight line method

Cost of machine: $34,000

Residual value: $10,000 and useful life is 5 yrs

Date of purchase: 1July, 2018

So for 2018 depreciation will be calculated for 9 months i.e from 1 July 2018 to 31 March 2018

So amount of depreciation in 2018 = (Cost of machine - Residual value)* 9 months/ (5yrs * 12months)

Amount of depreciation in 2018= ($34,000 - $10,000) * 9/ (5*12)= $3,600.

Amount of depreciation in 2019 = (Cost of machine - Residual Value)/ useful life

So, Amount of depreciation in 2019 = ( $34,000 - $10,000)/ 5 = $4,800.

Part B: Units of Production Method

Amount of depreciation in 2018 = ( Cost of Machine - Residual Value) * No of units produced in 2018/ No of units produced in 2018 & 2019

So, amount of depreciation in 2018 = ( $34,000 - $10,000) * 2500/ ( 2500 + 3200) = $10,526.31

Amount of depreciation in 2019 =  ( Cost of Machine - Residual Value) * No of units produced in 2019/ No of units produced in 2018 & 2019

So, amount of depreciation in 2019 = ( $34,000 - $10,000) * 3200/ ( 2500 + 3200) = $13,473. 68