Question

The Clarke Co. acquired a machine on May 1, 2006, at a cost of $60,000. The machine is expected to have a ten-year life and a residual value of $5,000. The estimated lifetime output from the machine is expected to be 55,000 units. Under which of the following depreciation methods would the depreciation charge be the greatest in 2006, if 9,100 units were produced in that year?

Answer 1

Generally there are mainly 4 methods of depreciation calculation.
1. Straight line
2. Double declining balance
3. Units of Production
4. Sum of years digit

Date of acquire - 01.05.2006
Cost - $ 60,000
Life - 10 years
Residual Value - $5,000
Life (in units) - 55,000 units
Depreciation for the year 2006

1. Straight line method - {(60,000 - 5,000)/10}*8/12 = $3667

2. Double declining balance method - (Op. bal of the year / Useful life of asset) * 2 = (60000 / 10) *2 *8/12 = $ 8000

3. Units of production = (No. of units produced / Life in no. of units)*(Cost-Salvage value) = (9100 / 55000)*(60000 - 5000) = $9,100

4. Sum of years digit = (Remaining Life / Sum of years digit)*(Cost - Salvage value) = (10 / 55)*(60000 - 5000)*8/12 = $6,667

Method of Depreciation	Amount
Straight line method	3667
Double declining method	8000
Unit production method	9100
Sum of years method	6667

As we can see, Units of production method produces the greatest amount of depreciation expenses for the year 2006 (May-Dec) is $9,100.

*Note: List of the available depreciations are not given in the question above. So the most common and popular $ methods are taken here for the purpose of the problem.
**Where ever '8/12' is taken in the calculation, is for the period in the that year of depreciation, which is 8 months (May to Dec, 2006)