Question

Question:
A machine costing $212,600 with a four-year life and an estimated $19,000 salvage value is installed in Luther Company's factory on January 1. The factory manager estimates the machine will produce 484,000 units of product during its life. It actually produces the following units: 122,100 in 1st year, 123,800 in 2nd year, 120,300 in 3rd year, 127,800 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 units of production.

YEAR	Depreciable Units	Depreciation Per Unit	Depreciation Expense
1	122,100 (correct)	$0.40
2	123,800 (correct)	$0.40
3	120,300 (correct)	$0.40
4	117,800(correct)	$0.40	47,120 (correct)
TOTAL	484,000

Answer 1

Units of production method is a depreciation method which is used when asset's value is dependent more on number if units it produces than useful life.

we will first find depreciation per unit and then multiply it with yearly production

last year's depreciation will be adjusted in order to have salvage value as book value.

Year	Depreciable Units	Depreciation per unit	Depreciation expense
1	122,100	$0.4	$48,840($122,100*$0.4)
2	123,800	$0.4	$49,520($123,800*$0.4)
3	120,300	$0.4	$48,120($120,300*$0.4)
4	117,800	$0.4	$47,120*
	484,000

Depreciation per unit= (Cost of asset-salvage ) /estimated units

($212,600-$19,000)/484,000

=$0.4 per unit

*Book value at the end of Year 3 =cost value-Accumulated depreciation upto year 3

$212,600-$48,840-$49,520-$48,120

=$66,120

we need salvage(Book value) at the end of year 4 = $19,000

So, difference will be depreciation expense for year 4 =$66,120-$19,000

=$47,120