1. Straight-line method of depreciation:
The straight-line method calculates depreciation expense evenly over the useful life of the asset. To calculate the annual depreciation expense, we need to subtract the salvage value from the initial cost and divide it by the useful life.
Initial cost: $295,000
Salvage value: $45,000
Useful life: 4 years
1. Year 1:
Depreciation expense = (Initial cost - Salvage value) / Useful life
Depreciation expense = ($295,000 - $45,000) / 4
Depreciation expense = $250,000 / 4
Depreciation expense = $62,500
2. Year 2:
Since the useful life is 4 years, the depreciation expense will remain the same each year under the straight-line method.
Depreciation expense = $62,500
2. Units-of-production method of depreciation:
The units-of-production method calculates depreciation based on the actual usage or production of the asset. To calculate the depreciation expense per unit, we need to divide the cost of the asset (minus the salvage value) by the total estimated units produced during its life.
Initial cost: $295,000
Salvage value: $45,000
Estimated units produced: 500,000
1. Year 1:
Depreciation expense per unit = (Initial cost - Salvage value) / Estimated units produced
Depreciation expense per unit = ($295,000 - $45,000) / 500,000
Depreciation expense per unit = $250,000 / 500,000
Depreciation expense per unit = $0.50
Depreciation expense = Depreciation expense per unit * Actual units produced
Depreciation expense = $0.50 * 110,000
Depreciation expense = $55,000
2. Year 2:
Depreciation expense = Depreciation expense per unit * Actual units produced
Depreciation expense = $0.50 * 165,000
Depreciation expense = $82,500
So, under each assumption:
1. Straight-line method:
Year 1: $62,500
Year 2: $62,500
2. Units-of-production method:
Year 1: $55,000
Year 2: $82,500