On January 2, Manning Co. purchases and installs a new machine costing $324,000

Question

On January 2, Manning Co. purchases and installs a new machine costing $324,000 with a five-year life and an estimated $30,000 salvage value. Management estimates the machine will produce 1,470,000 units of product during its life. Actual production of units is as follows: year 1, 355,600; year 2, 320,400: year 3, 317,000; year 4, 343,600; and year 5, 138,500. The total number of units produced by the end of year 5 exceeds the original estimate -this difference was not predicted. (The machine must not be depreciated below its estimated salvage value.)

Explanation / Answer

Year

Stright Line

Units of Production

Double Declining Balance

1

$ 58,800

$ 71,120

$ 1,29,600

2

$ 58,800

$ 64,080

$ 77,760

3

$ 58,800

$ 63,400

$ 46,656

4

$ 58,800

$ 68,720

$ 27,994

5

$ 58,800

$ 26,680

$ 11,990

1.Depreciation Under Stright Line Method

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

                             = ( $ 324000 - $30000 ) /5 Years

                             = $ 58,800 per , year

2. Depreciation Under Units Of Production Method

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

Depreciation Year 1 = $ 294000 x (355600 Units / 1470000 Units)

                             = $ 71120

Depreciation Year 2 = $ 294000 x (320400 Units / 1470000 Units)

                             = $ 64080

Depreciation Year 3 = $ 294000 x (317000 Units / 1470000 Units)

                             = $ 63400

Depreciation Year 4 = $ 294000 x (343600 Units / 1470000 Units)

                             = $ 68720

Depreciation Year 5 = $ 294000 x (133400 Units / 1470000 Units)

                             = $ 26680

3.Depreciation Under Double Declining Balance

Year

Book Value Begining

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

Net Book Value End

1

324000

129600

194400

2

194400

77760

116640

3

116640

46656

69984

4

69984

27994

41990

5

41990

11990

30000

***Stright Line Depreciation Rate = 1/5 = 20%

Year

Stright Line

Units of Production

Double Declining Balance

1

$ 58,800

$ 71,120

$ 1,29,600

2

$ 58,800

$ 64,080

$ 77,760

3

$ 58,800

$ 63,400

$ 46,656

4

$ 58,800

$ 68,720

$ 27,994

5

$ 58,800

$ 26,680

$ 11,990

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