2) A machine costing $450,000 with a 4-year life and an estimated salvage value

Question

2) A machine costing $450,000 with a 4-year life and an estimated salvage value of $30,000 is installed by Peters Company on January 1. The company estimates the machine will produce 1,050,000 units of product during its life. It actually produces the following units for the first 2 years: Year 1, 260,000; Year 2, 275,000. Enter the depreciation amounts for years 1 and 2 in the table below for each depreciation method. Show calculation of amounts below the table. Double- Units-of- Declining- tion Balance Year Year Year 2 Straight-Line

Explanation / Answer

Answer

Cost = 450,000

Life =4 Years

Salvage value = 30,000

Straight Line depreciation

Depreciation per year = (Cost – Salvage value) / Useful life

= (450,000 – 30,000) / 4 Years

Depreciation per year = 105,000 per year

Depreciation will remain same over 4 years.

Units of production method

Depreciable per unit produced = (Cost – Salvage value) / Estimated no. of production

= (450,000 – 30,000) / 1,050,000 units

Depreciation = $0.4 per unit

Year 1 = 260,000 Units * $0.4 per unit = 104,000

Year 2 = 275,000 Units * $0.4 per unit = 110,000

Double Declining Balance

Depreciation rate = 2 * Straight line rate (i.e. 450,000 is depreciable over 4 years so 25% per year)

= 2*25%

= 50%

Depreciation = Book value * Dep. Rate

Year 1 = 450,000 * 50% = 225,000

Year 2 = (450,000 – 225,000) * 50% = 112,500

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