Question

Case 1. A Company purchased a machine with a cost of $950,000. The company estimates the machine will have a useful life of 6 years and $50,000 salvage value.

The machine is expected to produce 600,000 units. The machine is estimated produce 150,000 units in year 1.

The machine is expected to run for 450,000 hours. The company projects in Year 1 the machine to run for 150,000 hours. Determine the depreciation expense for year 1 for a) b) c) below and Year 1 and Year 2 for d) double declining balance method.

Formula

a) Straight line method= Cost – salvage value / years of useful life

b) Production method = Step 1 Determine cost per unit = Cost – salvage / production unit

                                                Step 2 Cost per unit x units produced

c) Machine Hours method = Step 1 Determine cost per hour = Cost – salvage / machine hours

                                                Step 2 Cost per hour x hours worked

d) Double declining balance =         Year 1 = (Cost / years of life) x 200%

                                                                Year 2 = ((Cost – Year 1 Depreciation ) /years of life)) x 200%

Answer 1

a. As per Straight Line

As per Straight Line= ( Originial Cost- Salvage Value)/ Useful Life

=(950000-50000)/6=150000

Depreciation expense for year-1= $150000

b. As per Prodcution Method

Depreciation rate per Unit = (Original Cost- Salvage Value)/ Estimated Production Unit

=(950000-50000)/600000=1.5 per Unit

Depreciation expense for year-1= 150000*1.5=$225000

C. As per Machine Hour

Depreciation rate per Unit = (Original Cost- Salvage Value)/ Hour Worked

=(950000-50000)/450000=2 per Hour

Depreciation expense for year-1= 150000*2=$300000

d. As per Double Declining Balance Depreciation

DDB Rate= 1/6 X 200%= 33.33%

Depreciation expense for year-1= 950000*33.33%= $316635

Depreciation expense for year-2= (950000-316635)*33.33%= $211100