Question

Ryan Company purchased a new machine on January 1, 2017, at a cost of $45,000. The company estimated that the machine has a salvage value of $5,000 and a useful life of four years. The machine is expected to produce 400,000 units.

Required:

1. Calculate depreciation expense to the nearest whole dollar for each year of the machine's useful life using straight-line depreciation.

2. Calculate depreciation expense to the nearest whole dollar for each year of the machine's useful life using double declining-balance depreciation.

3. If the machine was used to produce and sell 120,000 units in 2017, what would be the depreciation expense using the units-of-production method?  

4. What is the book value of the machine after three years using the double declining-balance method?

5. What is the book value of the machinery after three years using the straight-line method?

Answer 1

Answer 1.

Cost of Machine = $45,000
Salvage Value = $5,000
Useful Life = 4 years

Annual Depreciation = (Cost of Machine - Salvage Value) / Useful Life
Annual Depreciation = ($45,000 - $5,000) / 4
Annual Depreciation = $10,000

Depreciation Expense, Year 1 = $10,000
Depreciation Expense, Year 2 = $10,000
Depreciation Expense, Year 3 = $10,000
Depreciation Expense, Year 4 = $10,000

Answer 2.

Cost of Machine = $45,000
Salvage Value = $5,000
Useful Life = 4 years

Straight-line Depreciation Rate = 1 / Useful Life
Straight-line Depreciation Rate = 1 / 4
Straight-line Depreciation Rate = 25%

Double-declining Depreciation Rate = 2 * Straight-line Depreciation Rate
Double-declining Depreciation Rate = 2 * 25%
Double-declining Depreciation Rate = 50%

Year 1:

Depreciation Expense = $45,000 * 50%
Depreciation Expense = $22,500

Ending Book Value = $45,000 - $22,500
Ending Book Value = $22,500

Year 2:

Depreciation Expense = $22,500 * 50%
Depreciation Expense = $11,250

Ending Book Value = $22,500 - $11,250
Ending Book Value = $11,250

Year 3:

Depreciation Expense = $11,250 * 50%
Depreciation Expense = $5,625

Ending Book Value = $11,250 - $5,625
Ending Book Value = $5,625

Year 4:

Depreciation Expense = $5,625 - $5,000
Depreciation Expense = $625

Ending Book Value = $5,625 - $625
Ending Book Value = $5,000

Answer 3.

Cost of Machine = $45,000
Salvage Value = $5,000
Useful Life = 400,000 units

Depreciation per unit = (Cost of Machine - Salvage Value) / Useful Life
Depreciation per unit = ($45,000 - $5,000) / 400,000
Depreciation per unit = $0.10

Depreciation Expense, Year 1 = 120,000 * $0.10
Depreciation Expense, Year 1 = $12,000

Answer 4.

Book Value after 3 years = $5,625

Answer 5.

Book Value after 3 years = $45,000 - 3 * $10,000
Book Value after 3 years = $15,000