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On 1st April 2008 Abdulla installs a new machinery costing SAR 312,000 with a five year...

On 1st April 2008 Abdulla installs a new machinery costing SAR 312,000 with a five year life and estimated salvage value of SAR28000. Management estimates that the machine will produce 1136000 units of the product during its lifetime. Actual units of production were as follows:
1st year 245600 units,
2nd year 230400 units,
3rd year 227000 units,
4th year 232600 units &
5th year 200400 units.
Compute depreciation Expenses under Straight-line method, Double declining balance method and Units of production Method method the machine must not be depreciated below its estimated salvage value.

Solutions

Expert Solution

a) Straight Line Method
Annual Depreciation by SLM = (312000-28000)/5
         56,800
Year Depreciation Expense Accumulated Depreciation Carrying Value
312000
1 56800 56800 255200
2 56800 113600 198400
3 56800 170400 141600
4 56800 227200 84800
5 56800 284000 28000
b) Calculation of depreciation by double declining balance method
Annual Depreciation by SLM = 56800
SLM Depreciation Rate = 56800/(312000-28000)
20%
Depreciation rate for Double Declining balance method = 20%*2 i.e. 40%
Year Opening Carrying Value Depreciation Expense Accumulated Depreciation Carrying Value
         312,000
1                          312,000          124,800          124,800          187,200
2                          187,200            74,880            74,880          112,320
3                          112,320            44,928            44,928            67,392
4                            67,392            26,957            26,957            40,435
5                            40,435            12,435            12,435            28,000
c) Unit of Production method
Depreciation per unit of production = (312000-28000)/1136000
0.25 per unit
Year Units of Production Depreciation Expense Accumulated Depreciation Carrying Value
272000
1 245600 61400 61400 250600
2 230400 57600 119000 193000
3 227000 56750 175750 136250
4 232600 58150 233900 78100
5 200400 50100 284000 28000
Straight Line Units of Production Double-Diminishing
Total Depreciation Expense          284,000          284,000          284,000
Accumulated Depreciation          284,000          284,000          284,000

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