Question

A machine costing $215,600 with a four-year life and an estimated $20,000 salvage value is installed in Luther Company’s factory on January 1. The factory manager estimates the machine will produce 489,000 units of product during its life. It actually produces the following units: 121,500 in 1st year, 123,000 in 2nd year, 121,500 in 3rd year, 133,000 in 4th year. The total number of units produced by the end of year 4 exceeds the original estimate—this difference was not predicted. (The machine must not be depreciated below its estimated salvage value.)

Compute depreciation for each year (and total depreciation of all years combined) for the machine under each Unit of production and Compute depreciation for each year (and total depreciation of all years combined) for the machine under each Double-declining-balance.

Answer 1

Depreciation per unit under units of production method = (cost-salvage value)/total estimated units

= (215,600-20,000)/489,000

= 0.4

Year	Depreciation
1	48,600 (121,500*0.4)
2	49,200 (123,000*0.4)
3	48,600 (121,500*0.4)
4	49,200

Depreciation in year 4 = 133,000*0.4 = 53,200

As depreciation cannot be made below the salvage value, Depreciation in year is limited to 49,200(215,600-48,600-49,200-48,600-20,000)

Total depreciation = 48,600+49,200+48,600+49,200 = 195,600

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Depreciation expense under Double declining balance method = (cost-accumulated depreciation)/useful life * 2

Year	Accumulated depreciation	Depreciation
1	0	107,800 [(215,600-0)/4*2]
2	107,800	53,900 [(215,600-107,800)/4*2]
3	161,700 (107,800+53,900)	26,950 [(215,600-161,700)/4*2]
4	188,650 (107,800+53,900+26,950)	6,950

Depreciation in year 4 = 13,475 [(215,600-188,650)/4*2]

As depreciation cannot be made below the salvage value, Depreciation in year 4 = 6,950 (215,600-20,000-188,650)

Total depreciation = 107,800+53,900+26,950+6,950 = 195,600