Question

On Jan 1,2016, the Allegheny corporation purchased machinery for115,000$. The estimated service life of the machinery is 10 yearsand the estimated residual value is 5000$. The machine is expectedto produce 220,000 units during its life.
Required; Calculate depreciation 2016-17 using each of thefollowing methods. Round all computations to the nearestdollar.

1. straight line

2. sum of the years digits

3. Double declining balance

4. one hundred fifty percent declining balance.

5. Units of production (units produced in 2016, 30,000; unitsproduced in 2017, 25,000).

Answer 1

Explanation:

The computation of the depreciation expense for the year 2016 and year 2017 is shown below:

1) Straight-line method:

= (Original cost - residual value) ÷ (useful life)

= ($115,000 - $5,000) ÷ (10 years)

= ($110,000) ÷ (10 years)  

= $11,000

In this method, the depreciation is same for all the remaining useful life

So for 2016 and 2017, the depreciation is $11,000

2. The sum of the years digits is

For 2016

= $110,000 ×  10 ÷ 55

= $20,000

For 2017

= $110,000 × 9 ÷ 55

= $18,000

The 55 is come from

= 10 years + 9 years + 8 years + 7 years + 6 years + 5 years + 4 years + 3 years + 2 years + 1 years

= 55

3.  Double-declining balance method:

First we have to find the depreciation rate which is shown below:

= One ÷ useful life

= 1 ÷ 10

= 10

Now the rate is double So, 20%

In year 2016, the original cost is $115,000, so the depreciation is $23,000 after applying the 20% depreciation rate

And, in year 2017, the ($115,000 - $23,000) × 20% = $18,400

4. Under the one hundred fifty percent declining method

We considered 15 percent

In year 2016, the original cost is $115,000, so the depreciation is $17,250 after applying the 15% depreciation rate

And, in year 2017, the ($115,000 - $17,250) × 15% = $14,662.50

5. Units-of-production method:

= (Original cost - residual value) ÷ (estimated production)  

= ($115,000 - $5,000) ÷ ($220,000 units)

= ($110,000) ÷ ($220,000 units)  

= $0.5 per units

For the year 2016, it is

= Production units in 2016 year × depreciation per unit

= 30,000 × $0.5

= $15,000

Now for the 2017 year, it would be  

= Production units in 2017 year × depreciation per unit

= 25,000 × $0.5

= $12,500