Question

Straight-Line and Units-of-Production Methods

Assume that Sample Company purchased factory equipment on January 1, 2017, for $70,000. The equipment has an estimated life of five years and an estimated residual value of $7,000. Sample's accountant is considering whether to use the straight-line or the units-of-production method to depreciate the asset. Because the company is beginning a new production process, the equipment will be used to produce 10,000 units in 2017, but production subsequent to 2017 will increase by 10,000 units each year.

Required:

1. Calculate the depreciation expense, accumulated depreciation, and book value of the equipment under both methods for each of the five years of its life. Enter all amounts as positive values.

Straight-line method:

	Annual	Accumulated	Book
Year	Depreciation	Depreciation	Value
2017	$	$	$
2018
2019
2020
2021

Units-of-production method:

	Annual	Accumulated	Book
Year	Depreciation	Depreciation	Value
2017	$	$	$
2018
2019
2020
2021

2. In this exercise, The units of production method results in a depreciation pattern opposite to which depreciation method?

Answer 1

Straight-line method

Year	Annual Depreciation ($)	Accumulated Depreciation ($)	Book Value ($)
2017	12,600	12,600	57,400
2018	12,600	25,200	44,800
2019	12,600	37,800	32,200
2020	12,600	50,400	19,600
2021	12,600	63,000	7,000

Straight Line Depreciation Expense = [Cost of the asset – Salvage Value] / Useful Life

= [$70,000 - $7,000] / 5 Years

= $63,000 / 5 Years

= $12,600 per year

Units-of-production method:

Year	Annual Depreciation ($)	Accumulated Depreciation ($)	Book Value ($)
2017	4,200	4,200	65,800
2018	8,400	12,600	57,400
2019	12,600	25,200	44,800
2020	16,800	42,000	28,000
2021	21,000	63,000	7,000

Depreciation under units of production method = [Cost of the asset – Salvage Value] x [Number of units produced / Expected total production]

Depreciation for Year 2017 = $4,200 [($70,000 - $7,000) x (10,000 / 150,000)]

Depreciation for Year 2018 = $8,400 [($70,000 - $7,000) x (20,000 / 150,000)]

Depreciation for Year 2019 = $12,600 [($70,000 - $7,000) x (30,000 / 150,000)]

Depreciation for Year 2020 = $16,800 [($70,000 - $7,000) x (40,000 / 150,000)]

Depreciation for Year 2021 = $21,000 [($70,000 - $7,000) x (50,000 / 150,000)]

*Here, the units of production is increased by 10,000 units each year