Question

Depreciation of assets

On January 1, 2020, a company purchased and placed in service some manufacturing equipment with a cost of $480,000. The company estimated the machine's useful life to be 5 years or 100,000 units of output with an estimated salvage value of $80,000. During the second year, 18,000 units were produced.

What is the depreciation for the second year of the machine’s useful life, assuming the company uses:

a. The straight-line method of depreciation
b. The units-of-production method of depreciation
c. The double-declining balance method of depreciation

Answer 1

a. The straight-line method of depreciation

Depreciation per annum = ( Cost - Salvage value)/Useful life

=(480,000-80,000)/5years

Depreciation=80,000 per annum

Second year depreciation = 80000 per annum.

b. The units-of-production method of depreciation

Depreciation = (Asset cost - Salvage value)*Units produced / Total estimated units

=(480,000-80000)*18000/100000

=400000*18000/100000

Second year depreciation = 72000

c. The double-declining balance method of depreciation

Depreciation rate = Asset cost/useful life * 2

= 100% / 5 *2

=40%

First year depreciation = 480000*40%

=192000

Written down value = 480000-192000

=288000

Second year depreciation = Written down value * Depreciation rate

=288000*40%

Second year depreciation = $115,200