Leprechaun Limited installed a computerized manufacturing machine in its factory

ID: 2548802 • Letter: L

Question

Leprechaun Limited installed a computerized manufacturing machine in its factory at the beginning of the year at a cost of S43,500. The machine's useful life is estimated at 10 years or 385,000 units of product, with a S5,000 salvage value. During its first and second years, the machine produced 41,300 and 32,500 units, respectively. REQUIRED: 1) Determine the machine's second-year depreciation expense under the following methods: (a) Straight-line (b) Double-declining balance (c) Units-of-production 2) Determine if the following is a true or false statement and explain your answer: "Over the estimated useful life of the machine described above, the company will record greater depreciation expense using the straight-line method of depreciation than if the double-declining balance method of depreciation was chosen."

Explanation / Answer

1.Depreciation Under Stright Line Method

Depreciation = ( Cost of the Equipment – Salvage Value ) / Usefull Life

= ( $ 43500 - $ 5000 ) /10 Years

= $ 3850 year

Depreciation Year 1 = $ 3850

Depreciation Year 2 = $ 3850

2.Depreciation Under Units of Production Method

Depreciation = [(Cost of Equipment - Residual Value) / Estimated Total units] x Actual units

Depreciation Year 1 = [ ($ 43500 - $ 5000) / 385000 Units ] x 41300 Units

= $ 4130

Depreciation Year 2 = [ ($ 43500 - $ 5000) / 385000 Units ] x 32500 units

= $ 3250

Depreciation Year 1 = $ 4130

Depreciation Year 2 = $ 3250

3.Depreciation Under DDB Method

Year

Book Value Begining

Double Declining Depreciation = 2 x SL Depreciation Rate x Book Value Begining

Net Book Value End

$ 43500

$ 8700

$ 34800

$ 6960

$ 27840

***Stright Line Rate = 1/10 = 10%

Depreciation Year 1 = $ 8700

Depreciation Year 2 = $ 6960