To calculate depreciation expense, we need to first determine the depreciable cost of the machine, which is the cost of the machine minus its estimated residual value.
Depreciable cost = Cost of machine - Residual value
Depreciable cost = $36,500 - $11,500 = $25,000
Using the straight-line method, the annual depreciation expense is calculated by dividing the depreciable cost by the estimated useful life of the asset.
Straight-line depreciation expense = Depreciable cost / Useful life
For this machine, the straight-line depreciation expense would be:
Straight-line depreciation expense = $25,000 / 5 years = $5,000 per year
Using the units-of-production method, the annual depreciation expense is calculated by multiplying the depreciation rate per unit by the number of units produced during the year.
Units-of-production depreciation rate = Depreciable cost / Total estimated units of production
Units-of-production depreciation rate = $25,000 / 10,000 units = $2.50 per unit
For 2021, the units-of-production depreciation expense would be:
Units-of-production depreciation expense for 2021 = 1,350 units x $2.50 per unit = $3,375
For 2022, the units-of-production depreciation expense would be:
Units-of-production depreciation expense for 2022 = 1,800 units x $2.50 per unit = $4,500
Using the double-declining balance method, the annual depreciation expense is calculated by applying a fixed rate of depreciation to the book value of the asset at the beginning of the year. The fixed rate of depreciation is double the straight-line rate, which is 40% for a 5-year asset.
To calculate the book value at the beginning of each year, we start with the depreciable cost and subtract the accumulated depreciation from previous years.
Year 1:
Beginning book value = Depreciable cost = $25,000
Depreciation expense = Beginning book value x Depreciation rate = $25,000 x 40% = $10,000
Accumulated depreciation = Depreciation expense = $10,000
Ending book value = Beginning book value - Accumulated depreciation = $25,000 - $10,000 = $15,000
Year 2:
Beginning book value = Ending book value from previous year = $15,000
Depreciation expense = Beginning book value x Depreciation rate = $15,000 x 40% = $6,000
Accumulated depreciation = Accumulated depreciation from previous year + Depreciation expense = $10,000 + $6,000 = $16,000
Ending book value = Beginning book value - Accumulated depreciation = $15,000 - $6,000 = $9,000
Therefore, the depreciation expense for 2021 using the double-declining balance method is $10,000, and the depreciation expense for 2022 is $6,000.
In summary:
- Depreciation expense for 2021 using straight-line method = $5,000
- Depreciation expense for 2022 using straight-line method = $5,000
- Depreciation expense for 2021 using units-of-production method = $3,375
- Depreciation expense for 2022 using units-of-production method = $4,500
- Depreciation expense for 2021 using double-declining balance method = $10,000
- Depreciation expense for 2022 using double-declining balance method = $6,000