Question

A machine that produces cellphone components is purchased on January 1, 2016, for $100,000. It is expected to have a useful life of four years and a residual value of $10,000. 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.

Required:

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

i.) Straight-line method

ii.) Units-of-production method

iii.) Double-diminishing method

b.) Which method results in the highest depreciation expense:

i.) during the first two years?

ii.) over all four years?

Answer 1

Calculation of Depreciation charge each year
i) Straight line method = Cost-residule value/estimated useful life
100000-10000/4 = 22500
straight line method = $22500 per year
ii) unit of production
Depreciation p.u = Depreciable value/total no of unit
depreciation p.u = (100000-10000)/200000
Depreciation p.u = 0.45
Yr	Production-(a)	Dep p.u - (b)	dep (a)*(b)
2016	40000	0.45	18000
2017	50000	0.45	22500
2018	60000	0.45	27000
2019	50000	0.45	22500
iii) Double diminishing method
Rate of depreciation = 1/4yr*2 = 50%
Year	WDV	Dep @50%	WDV closing
2016	100000	50000	50000
2017	50000	25000	25000
2018	25000	12500	12500
2019	12500	2500	10000
b) (i) Double deminishing method has highest dep exp in first 2 years
ii) all are the same depreciation in all 4 years