Question

In: Finance

You are a financial analyst for Loch Motor Company and have been asked to determine the...

You are a financial analyst for Loch Motor Company and have been asked to determine the impact of alternative depreciation methods. For your analysis, you have been asked to compare methods based on a machine that cost $206,000. The estimated useful life is 12 years, and the estimated residual value is $46,160. The machine has an estimated useful life in productive output of 222,000 units. Actual output was 31,000 in year 1 and 27,000 in year 2.

Required:

1. For years 1 and 2 only, prepare separate depreciation schedules assuming: (Do not round intermediate calculations and round your final answers to the nearest dollar amount.)

a. Straight-line method.

b. Units-of-production method.

Solutions

Expert Solution

1)
a. Straight-line method:
Year Cost Depreciation Accumulated depreciation Ending Book Value
1 $       2,06,000 $       13,320 $       13,320 $ 1,92,680
2 $       2,06,000 $       13,320 $       26,640 $ 1,79,360
Working:
Straight line depreciation = (Cost - Salvage value)/Useful Life
= (206000-46160)/12
= $       13,320
b. Units-of-production method.
Year Cost Depreciation Accumulated depreciation Ending Book Value
1 $       2,06,000 $       22,320 $       22,320 $ 1,83,680
2 $       2,06,000 $       19,440 $       41,760 $ 1,64,240
Working:
Depreciation expense per unit of production = (Cost - Salvage value)/Useful Life
= (206000-46160)/222000
= $            0.72
Year Actual output Depreciation rate per unit Depreciation expense
a b c=a*b
1               31,000 $            0.72 $       22,320
2               27,000 $            0.72 $       19,440

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