Question

A machine costing $213,400 with a four-year life and an estimated $17,000 salvage value is installed in Luther Company's factory on January 1. The factory manager estimates the machine will produce 491,000 units of product during its life. It actually produces the following units: 122,600 in 1st year, 122,600 in 2nd year, 120,000 in 3rd year, 135,800 in 4th year. The total number of units produced by the end of year 4 exceeds the original estimate this difference was not predicted. (The machine must not be depreciated below its estimated salvage value.)

Compute depreciation for each year (and total depreciation of all years combined) for the machine under each depreciation method.

Answer 1

Depreciation must be calculated for a $213,400 machine using straight-line, declining balance, and units-of-production methods. Care must be taken to ensure that total depreciation does not fall below the estimated salvage value of $17,000. Annual depreciation will vary by method and actual production.

Step-by-step explanation:

The question involves calculating depreciation for a machine using different methods. For a machine with a cost of $213,400, a salvage value of $17,000, a four-year life, and actual production differing each year, depreciation needs to be computed under the straight-line, declining balance, and units-of-production methods. The total number of units produced over the four years is 501,000 (122,600 + 122,600 + 120,000 + 135,800).

Straight-line depreciation would result in an equal amount of depreciation each year after subtracting the salvage value from the cost and dividing by the machine's useful life.

Declining balance depreciation would involve a constant rate but apply it to a decreasing book value each year.

Units-of-production depreciation would allocate the cost based on the number of units produced each year.

In this scenario, the actual number of units produced exceeded the initial estimate, impacting the units-of-production method. Since we cannot depreciate below the salvage value, the maximum total depreciation for all years combined would be the machine cost minus the salvage value ($213,400 - $17,000).

The depreciation each year would vary based on the chosen method and the number of units produced or the remaining book value in the case of the declining balance approach. Total depreciation, as calculated by adding up the annual depreciation costs for all years, must not exceed the machine's cost minus its salvage value.