Question

Now attempt this exercise on depreciation methods:

On January 2, Year 1, Logan Co. purchased a manufacturing machine for $864,000. The machine has an 8-­year estimated life and a $144,000 estimated salvage value. Logan expects to manufacture 1,800,000 units over the life of the machine. During Year 2, Logan manufactured 300,000 units. Calculate the Year 2 depreciation expense using (1) straight-line depreciation, (2) double-declining balance depreciation, and (3) sum-of-the-years digits

Answer 1

		Year 2 depreciation
Straight line		$      90,000.00
DDB		$   1,62,000.00
sum-of-the-years digits		$   1,40,000.00

Working

Double declining Method
A	Cost	$     8,64,000.00
B	Residual Value	$     1,44,000.00
C=A - B	Depreciable base	$     7,20,000.00
D	Life [in years]	8
E=C/D	Annual SLM depreciation	$        90,000.00
F=E/C	SLM Rate	12.50%
G=F x 2	DDB Rate	25.00%

Depreciation schedule-Double declining
Year	Beginning Book Value	Depreciation rate	Depreciation expense	Accumulated Depreciation	Ending Book Value
1	$      8,64,000.00	25.00%	$         2,16,000	$   2,16,000.00	$   6,48,000.00
2	$      6,48,000.00	25.00%	$         1,62,000	$   3,78,000.00	$   4,86,000.00

Sum-of-the-Years'-Digits Method
A	Cost	$     8,64,000.00
B	Residual Value	$     1,44,000.00
C=A - B	Depreciable base	$     7,20,000.00
	Sum of digits with 5 years (8+7+6+5+4+3+2+1)	36

Year	Depreciable base	Formula	Depreciation expense	Accumulated Depreciation	Ending Book Value
1	$      7,20,000.00	(([720000x8/36]/)	$   1,60,000.00	$   1,60,000.00	$   7,04,000.00
2	$      7,20,000.00	(([720000x7/36]/)	$   1,40,000.00	$   3,00,000.00	$   5,64,000.00

Straight line Method
A	Cost	$     8,64,000.00
B	Residual Value	$     1,44,000.00
C=A - B	Depreciable base	$     7,20,000.00
D	Life [in years left ]	8
E=C/D	Annual SLM depreciation	$        90,000.00