Question

Assume that Sample Company purchased factory equipment on January 1, 2016, for $60,000. The equipment has an estimated life of five years and an estimated residual value of $6,000. Sample's accountant is considering whether to use the straight-line or the units-of-production method to depreciate the asset. Because the company is beginning a new production process, the equipment will be used to produce 10,000 units in 2016, but production subsequent to 2016 will increase by 10,000 units each year.
Required: 1. Calculate the depreciation expense, accumulated depreciation, and book value of the equipment under both methods for each of the five years of its life. Enter all amounts as positive values. In this exercise, The units of production method results in a depreciation pattern opposite to which depreciation method?

Answer 1

Answer:

STRAIGHT LINE METHOD  

Year dep expense acc dep net book value

-                                              $60,000.00

1  $10,800.00   $10,800.00   $49,200.00

2  $10,800.00   $21,600.00   $38,400.00

3  $10,800.00   $32,400.00   $27,600.00

4  $10,800.00   $43,200.00   $16,800.00

5  $10,800.00   $54,000.00   $6,000.00

units-of-production    

Year Production rate dep expense acc dep net book value

-                                                                        $60,000.00

1 10,000 0.36  $3,600.00   $3,600.00   $56,400.00

2 20,000 0.36  $7,200.00   $10,800.00   $49,200.00

3 30,000 0.36  $10,800.00   $21,600.00   $38,400.00

4 40,000 0.36  $14,400.00   $36,000.00   $24,000.00

5 50,000 0.36  $18,000.00   $54,000.00   $6,000.00

Explanation:

Straight-line method

60,000 - 6,000 = 54,000

54,000/5 = 10,800 depreciation per year

units-of-productions

First, we calculate the production for each year. adding10,000 tothe previous year production.

Then, we add them all and calculate the rate:

54,000 / 150,000 = 0.36

Finally we multiply each production by the rate to get the depreciation expense

10,000 x 0.36 3,600

20,000 x 0.36 = 7,200

and so on.