Question

The cost of equipment purchased by Service, Inc., on July 1, 2017 was $200,000. It is estimated that the machine will have no salvage value at the end of its service life. Its service life is estimated at 5 years, and its total production is estimated at 500,000 units. During 2017, the machine produced 55,000 units. During 2018, the machine produced 48,000 units.

Instructions:

Compute depreciation expense on the machine for the year ending December 31, 2017, and the year ending December 31, 2018, using the following methods.

(a) Straight-line

(b) Units-of-output

Answer 1

Depreciation expense on the machine for the year ending December 31, 2017, and the year ending December 31, 2018 is as follows:

a) Straight-line:

Depreciation p.a. = (Cost - Salvage Value) / Estimated useful life

= ($200,000 - $0) / 5 Years

= $200,000 / 5

= $40,000

1) Depreciation expense on the machine for the year ending December 31, 2017 is :

( For July 1, 2017 to December 31, 2017) = for 6 months

Depreciation expense = $40,000 * 6/12

= $20,000

Depreciation expense on the machine for the year ending December 31, 2017 is $20,000

2) Depreciation expense on the machine for the year ending December 31, 2018 is :

Depreciation is for whole year

Therefore, Depreciation expense = $40,000

Depreciation expense on the machine for the year ending December 31, 2018 is $40,000

b) Units-of-output:

Depreciation p.a. = (Cost - Salvage Value) / Total Productions

= ($200,000 - $0) / 500,000 units

= $200,000 / 500,000 units

= $0.4 per unit

1) Depreciation expense on the machine for the year ending December 31, 2017 is :

Depreciation expense = 55,000 units * $0.4 per unit

= $22,000

Depreciation expense on the machine for the year ending December 31, 2017 is $22,000

2) Depreciation expense on the machine for the year ending December 31, 2018 is :

Depreciation expense = 48,000 units * $0.4 per unit

= $19,200

Depreciation expense on the machine for the year ending December 31, 2018 is $19,200