Question

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.

Answer 1

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