Question

On January 1, Year 1, Dunn Brothers, Inc., purchased a new smartphone case making machine at a cost of $80,000. The estimated residual value was $9,000. Assume that the estimated useful life was four years and the estimated productive life of the machine was 710,000 units. Actual annual production was as follows: Year Units 1 213,000 2 156,200 3 195,250 4 145,550 Required: a. Calculate depreciation expense under the Straight-line method for Years 1 to 4. b. Calculate depreciation expense under the Units-of-production method for Years 1 to 4. c. Complete a depreciation schedule under the Double-declining-balance method.

Answer 1

Depreciation expense under:

• the Straight-line method for Years 1 to 4 is $71,000.
• the Units-of-production method for Years 1 to 4 is $71,000.
• the Double-declining-balance method is $75,000.

Step-by-step explanation:

Under straight-line method, depreciation expense is (cost - residual value) / No of years = ($80,000 - $9,000) / 4 years = $17,750 yearly depreciation expense.

Depreciation expense for Years 1 to 4 is $17,750 x 4 years $71,000.

The unit-of-production method is used when the asset value closely relates to the units of output it is able to produce. It is expressed with the formula below:

(Original Cost - Salvage value) / Estimated production capacity x Units/year

At Year 1, depreciation expense (DE) is: ($80,000 - $9,000) / 710,000 units x 213,000 units = $21,300

At Year 2, DE = $71,000 / 710,000 units x 156,200 units = $15,620

At Year 3, DE = $71,000 / 710,000 units x 195,250 units = $19,525

At Year 4, DE = $71,000 / 710,000 units x 145,550 units = $14,555

Note that this depreciation method results in higher depreciation charge when the asset is heavily used, at this time, it was in Year 1, followed by Year 2.

Depreciation expense for Years 1 to 4, under this method, is $71,000 (addition of all the yearly depreciation).

The double-declining method is otherwise known as the reducing balance method and is given by the formula below:

Double declining method = 2 X SLDP X BV

SLDP = straight-line depreciation percentage

BV = Book value

SLDP is 100%/4years = 25%, then 25% multiplied by 2 to give 50%

At Year 1, 50% X $80,000 = $40,000

At Year 2, 50% X $40,000 ($80,000 - $40,000) = $20,000

At Year 3, 50% X $20,000 ($40,000 - $20,000) = $10,000

At Year 4, 50% X $10,000 ($20,000 - $10,000) = $5,000 (the depreciation expense would stop at this stage since the amount falls below the residual value).

Depreciation expense for Years 1 to 4, under this method, is $75,000 (addition of all the yearly depreciation).