Question

Assume you work for a company as an accountant and you have been asked to calculate the depreciation expense for each year of a new machine that your company purchased on April 1, 2021, at a cost of $ 350,000. You have estimated that the machine will have a salvage value of $15,000. The machine is expected to be used for 27,800 working hours during its 5-year life.

a) Prepare the depreciation schedule for each year of the useful life under
straight line method.

b) Compute the depreciation expense for 2021, 2022 and 2023 under units-of activity method, assuming machine usage was 2700 hours in 2021 and 3500 hours and 2200 hours in 2022 and 2023 respectively.

Answer 1

a) Depreciation Schedule under Straight-Line Method:

Date Cost Depreciation Accumulated Net Book Value

Expense Depreciation

April 1, 2021 $350,000 $50,250 $50,250 $299,750

2022 350,000 67,000 117,250 232,750

2023 350,000 67,000 184,250 165,750

2024 350,000 67,000 251,250 98,750

2025 350,000 67,000 318,250 31,750

b) Depreciation expense under the units-of-activity method:

2021 2,700 * $12.05 = $32,535

2022 3,500 * $12.05 = $42,175

2023 2,200 * $12.05 = $26,510

Step-by-step explanation:

a) Data and Calculations:

Cost of equipment on April 1, 2021 = $350,000

Estimated salvage value = $15,000

Depreciable amount = $335,000

Estimated useful life = 5 years

Annual Depreciation:

Straight-line method = $67,000 ($335,000/5)

Expected machine usage hours = 27,800

Depreciation rate under the unit-of-activity method = $335,000/27,800

= $12.05