A machine that produces cellphone components is purchased on January 1, 2016, fo

Question

A machine that produces cellphone components is purchased on January 1, 2016, for $147,000. It is expected to have a useful life of four years and a residual value of $15,000. The machine is expected to produce a total of 200,000 components during its life, distributed as follows: 40,000 in 2016; 50,000 in 2017; 60,000 in 2018; and 50,000 in 2019. The company has a December 31 year end.

Calculate the amount of depreciation to be charged each year, using each of the following methods:

Explanation / Answer

(i) Straight Line Method :-

Depreciation =( Purchased Price – Residual Value)/Useful Life

          = (147000 – 15000)/4 years = $ 33000 per yr

(ii) Units of Production Method :-

Total components produce during its life = 200000

Depreciation per unit= (Cost – Salvage value) / Component produced during its entire life

                = (147000 – 15000)/200000 = 0.66

2016 (40000 * 0.66)

26400

2017 (50000 * 0.66)

33000

2018 (60000 * 0.66)

39600

2019 (50000 * 0.66)

33000

(iii) Double Diminishing Balance Method :-

Rate = Straight line method rate * 2

Straight line method rate =( 1/life) * 100

                   = ¼ * 100 = 25%

Double Declining Balance method rate = 25 * 2 = 50%

2016 (147000 * 50%)

73500

2017 (147000 – 73500) * 50%

36750

2018 (147000 – 73500 – 36750) * 50%

18375

2019 (147000 – 73500 – 36750 - 18375) * 50%

9187.5

Which Method Result in Highest Depreciation Expense :-

(i) During the first 2 year = Double Diminishing Balance Method

(ii) Over all 4 years = Double Diminishing Balance Method

2016 (40000 * 0.66)

26400

2017 (50000 * 0.66)

33000

2018 (60000 * 0.66)

39600

2019 (50000 * 0.66)

33000

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