Question

In: Accounting

A machine costing $209,800 with a four-year life and an estimated $17,000 salvage value is installed...

A machine costing $209,800 with a four-year life and an estimated $17,000 salvage value is installed in Luther Company’s factory on January 1. The factory manager estimates the machine will produce 482,000 units of product during its life. It actually produces the following units: 123,200 in 1st year, 123,700 in 2nd year, 119,800 in 3rd year, 125,300 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:

Compute depreciation for each year (and total depreciation of all years combined) for the machine under each depreciation method. (Round your per unit depreciation to 2 decimal places. Round your answers to the nearest whole dollar.)

Solutions

Expert Solution

STRAIGHT LINE METHOD :

Depreciation expense : [Cost -residual value ]/useful life

                          = [209800- 17000]/4

                          = 192800 /4

                          = 48200

Year Depreciation expense
1 48200
2 48200
3 48200
4 48200

Method 2 :Units of production method

Depreciation expense =[Cost-residiual value ]/useful llife in units

                           = [209800 - 17000]/482000

                          = $ .40 per unit

Year Units Depreciation expense
1 123200 123200*.40=49280
2 123700 49480
3 119800 47920
4 115300    {Balancing units} 46120
Total 482000 192800

#The actual units exceed the estimated units ,thus depreciation for year 4 is restricted to estimated units .

Method 3 :Double declining method :

Depreciation rate = 2/ useful life

                   = 2/4

                   = .50 or 50%

Year Depreciation expense Book value
1 209800*.50 = 104900 209800-104900=104900
2 104900*.50 = 52450 104900-52450=52450
3 52450*.50=26225 52450-26225=26225
4 26225-17000=9225 17000

The actual depreciation for year 4 = 26225*50%=13112.5 which makes salvage value at end of year 4 falls to 26225-13112.5=13112.5 ,thus depreciation for year 4 is restricted such that book value at end of year 4 equals to residual value required = 17000


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