Question

You are a financial analyst for Loch Motor Company and have been asked to determine the impact of alternative depreciation methods. For your analysis, you have been asked to compare methods based on a machine that cost $246,000. The estimated useful life is 10 years, and the estimated residual value is $62,000. The machine has an estimated useful life in productive output of 230,000 units. Actual output was 35,000 in year 1 and 31,000 in year 2.

Required:
For years 1 and 2 only, prepare separate depreciation schedules assuming:
a. Straight-line method.
b. Units-of-production method.
c. Double-declining-balance method.

Answer 1

a. Straight-line method.

depreciable value = $246,000 - $62,000 = $184,000

deprecaition expense per year = $184,000 / 10 = $18,400

year depreciation expense book value

1 $18,400 $227,600

2 $18,400 $209,200

b. Units-of-production method.

depreciable value = $246,000 - $62,000 = $184,000

deprecaition expense per unit = $184,000 / 230,000 = $0.80

year depreciation expense book value

1 $28,000 $218,000

2 $24,800 $193,200

c. Double-declining-balance method.

depreciation expense year 1 = $246,000 x 1/10 x 2 = $49,200

depreciation expense year 2 = $196,800 x 1/10 x 2 = $39,360

year depreciation expense book value

1 $49,200 $196,800

2 $39,360 $157,440