Question

Ramirez company installs a computerized manufacturing machine in its factory at the beginning of the year at a cost of $43,500. The machine's useful life is estimated at 10 years, or 385,000 units of product, with a $5,000 salvage value. During its second year, the machine produces 32,500 units of product.

A. Determine the machine's second year depreciation and year end book value under the straight-line method.

B. Determine the machine's second year depreciation using the units-of-production method.

C. Determine the machine's second-year depreciation using the double-declining-balance method.

Answer 1

A.  

Depreciation expense per year (Straight line method)

= (Cost - salvage value) / Years

= ($43,500 - $5,000) /10

= $38,500 / 10

= $3,850

Second year depreciation expense = $3,850

Book value at the end of second year = Cost - first year depreciation expense - second year depreciation expense

= $43,500 - $3,850 - $3,850

= $35,800

B.

Second year depreciation using the units of production method

Accumulated Depreciation = Cost - salvage value

= $43,500 - $5,000

= $38,500

Second year depreciation = (Accumulated depreciation / Total units produced) * Production in second years

= ($38,500 / 385,000) * 32,500

= $3,250

C.  

Depreciation rate under double declining balance method

= Straight line depreciation rate * 2

= (100/10) * 2

= 20%

Depreciation expense for first year = Cost * 20%

= $43,500 * 20%

= $8,700

Depreciation expense for second year = ($43,500 - $8,700) * 20%

= $6,960