Question

A machine was acquired on January 1, 2015, at a cost of $80,000. The machine was originally estimated to have a residual value of $5,000 and an estimated life of 5 years. The machine is expected to produce a total of 100,000 components during its life, as follows: 15,000 in 2015, 20,000 in 2016, 20,000 in 2017, 30,000 in 2018, and 15,000 in 2019.

Instructions
(a)   Calculate the amount of depreciation to be charged each year, using each of the following methods:
   1.   Straight-line method
   2.   Units-of-production
   3.   Double diminishing-balance
(b)   Which method results in the highest depreciation expense during the first two years? Over all five years?

Answer 1

(a)

1. Straight line method = ($80,000 - $5,000) / 5 = $15,000

2. Units of production = ($80,000 - $5,000) / 100,000) X 15,000 = $11,250

3. Double declining balance = $80,000 X 40% = $32,000

Depreciation rate = (100 / 5 useful life) X 2 = 40%

(b)

Depreciation for two years:

Straight line method = $15,000 X 2 = $30,000

Units of production = ($80,000 - $5,000) / 100,000) X (15,000 + 20,000) = $26,250

Double declining balance = $32,000 + ($80,000 - $32,000) X 40% = $51,200

Double declining balance method has highest depreciation during the first two years.

Depreciation for five years:

Straight line method = $80,000 - $5,000 = $75,000

Units of production = ($80,000 - $5,000) / 100,000) X (15,000 + 20,000 + 20,000 + 30,000 + 15,000)

= $75,000

Double declining balance method = $32,000 + $19,200 + $11,520 + $6,912 + $4,147 = $73,779

Depreciation for overall five years is same and more under straight line method and units of production method.