Strong Metals Inc. purchased a new stamping machine at the beginning of the year at a cost of $1,567,500. The estimated residual value was $82,500. Assume that the estimated useful life was five years and the estimated productive life of the machine was 300,000 units. Actual annual production was as follows: Year Units 1 70,000 2 67,000 3 50,000 4 73,000 5 40,000 Required: 1. Complete a separate depreciation schedule for each of the alternative methods. a. Straight-line. b. Units-of-production. c. Double-declining-balance.

See answer below.

Explanation:

The depreciable amount of the machine is computed as follows.

cost - residual value = 1,567,500 - 82,500 = $1,485,000.

Estimated usefule life = 5 years

Question 1

Using  the straight line depreciation method, the asset will be depreciated equally every year by

Year 1 Depreciation = $297,000

Year 2 Depreciation = $297,000

Year 3 Depreciation = $297,000

Year 4 Depreciation = $297,000

Year 5 Depreciation = $297,000

Question 2

Using the unit of production method, the machine will be depreciated by the ratio of actual usage to estimated production life, until it is fully depreciated.

Year 1 Depreciation = = $841,500

Year 2 Depreciation = = $331,650

Year 3 Depreciation = = $247,500

Year 4 Depreciation = = $64,350

Year 5 Depreciation = 0.

Year 4 computation arose because the computed depreciation using the unit of production method would push the computed accumulated depreciation beyond the total depreciation allowed. As such, the residual balance was adopted in year 4.

Question 3

Using the double declining balance method, the machine would be depreciated at twice the depreciation rate of the straight line balance on the reducing balance of the asset, until this method results in a depreciation figure lower than the straight line method.

Depreciation rate = = 40%

Year 1 depreciation = = $594,000

Year 2 depreciation = = $356,400

Year 3 depreciation = = $178,200

Year 4 depreciation = = $178,200

Year 5 depreciation = = $178,200.

Because year 3 depreciation using the usual double declining method would result in a figure lower than the straight line depreciation rate (297,000), we used the straight line formula for the depreciation from years 3 to 5.

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