Question

Duluth Ranch, Inc. purchased a machine on January 1, 2018. The cost of the machine was $38,000. Its estimated residual value was $12,000 at the end of an estimated 5-year life. The company expects to produce a total of 20,000 units. The company produced 1,400 units in 2018 and 1,850 units in 2019.


Required:

Calculate depreciation expense for 2018 and 2019 using the straight-line method.

Calculate the depreciation expense for 2018 and 2019 using the units-of-production method.

Calculate depreciation expense for 2018 through 2022 using the double-declining balance method.

Answer 1

Straight line method :

Depreciation per annum = [ Cost - Estimated residual value ] / Estimated useful life = [ $38,000 - $12,000 ] / 5 years = $5,200 per annum

Depreciation for 2018 = $5,200

Depreciation for 2019 = $5,200

Units of production method :

Depreciation per unit = [ Cost - Estimated residual value ] / Total estimated units to be produced = [ $38,000 - $12,000 ] / 20,000 units = $1.3 per unit

Depreciation for 2018 = Units produced in 2018 * Depreciation per unit = 1,400 units * $1.3 = $1,820

Depreciation for 2019 = Units produced in 2019 * Depreciation per unit = 1,850 units * $1.3 = $2,405

Double declining balance method :

Straight line depreciation rate = 100% / Estimated useful life = 100% / 5 years = 20%

Double declining depreciation rate = Straight line depreciation rate * 2 = 20% * 2 = 40%

Year	Book value at the beginning of the year (A)	Depreciation for the year [ A * 40% ]	Accumulated deprecation (B)	Book value at the end of the year [ Original cost - B ]
1 (2018)	$38,000	$15,200	$15,200	$22,800
2 (2019)	$22,800	$9,120	$24,320	$13,680
3 (2020)	$13,680	$1,680	$26,000	$12,000
4 (2021)	$12,000	$0	$26,000	$12,000
5 (2022)	$12,000	$0	$26,000	$12,000

Maximum depreciation that can be recorded = Original cost - Estimated residual value = $38,000 - $12,000 = $26,000

Till the end of year 2 we have recorded deprecation of $24,320

Depreciation that can be recorded after 2nd year = Maximum depreciation that can be recorded - Depreciation recorded till the end of year 2 = $26,000 - $24,320 = $1,680

Depreciation as per double declining rate for year 3 = Book value at the beginning of the year * Double declining depreciation rate = $13,680 * 40% = $5,472

But we cannot record $5,472 as depreciation for year 3, as we cannot record more than $1,680 as depreciation after year 2.

So, in 3rd year, $1,680 will be recorded as the depreciation and after that no depreciation will be recorded for year 4 & 5.