Question

A machine costing $257,500 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 475,000 units of product during its life. It actually produces the following units: 220,000 in 1st year, 124,600 in 2nd year, 121,800 in 3rd year, 15,200 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.)

Required Prepare a table with the following column headings and compute depreciation for each year (and total depreciation of all years combined) for the machine under each depreciation method.

Answer 1

1) Strait-Line

($257,500 - $20,000)/4 = $59,375 each year
Total depreciation: $237,500 for 4 years

2) Units-of Production
Depreciation cost per unit: ($257,500 - $20,000)/475,000 = $0.50

Depreciation Expense:
year 1 220,000 x .50 = 110,000
year 2 124,600 x .50 = 62,300
year 3 121,800 x .50 = 60,900
year 4 15,200   x .50 = 7,600
Total Depreciation $240,800; the fourth year depreciation expense is $7,600 - $3,300=$4,300
Adjusted depreciation expense $237,500.

3) Double-Declining-Balance

the straight-line rate: 100%/4=25%
Double the straight-line rate 50%

Depreciation Expense:
Year 1: $257,500 x 50% = $128,750
Year 2: ($257,500-128,750) x 50% =$64,375
Year 3: ($257,500-128,750-64,375) x 50% =$32,188
Year 4. 32,188 ~ 12,188

in year 4: 32,188 x .50 would be 16,094 which is below the salvage value of 20,000 so you can't do it. So you take the beginning book value - from your salvage value: 32,188-20,000 = 12,188