Solar Innovations Corporation bought a machine at the beginning of the year at a cost of $35,000. The estimated useful life was five years and the residual value was $3,500. Assume that the estimated productive life of the machine is 10,000 units. Expected annual production for year 1, 2,000 units; year 2, 3,000 units; year 3, 2,000 units; year 4, 2,000 units; and year 5, 1,000 units.

Refer explanation

Explanation:

1. Straight-line depreciation:

It is the simplest method of calculating depreciation and believes that the asset's value depreciates equally every year.

Depreciation per year = (Cost of asset - salvage value) / number of useful life years.

Please refer attached table one for all years depreciation.

2. Double-declining balance Method:

This is where the asset's value is depreciated at twice the rate than the straight line method. The depreciation amounts would be higher in the early years of the asset's life and gradually reduce towards the end. Hence, it does not mean that the depreciation amount would be higher than the straight line basis.

Straight Line depreciation per year = 1/5* x 100 = 20%

*as it is useful for five years

Hence double-depreciation value = 20% x 2 = 40%

It is calculated as depreciation rate x book value of asset at the beginning of the period.

Please refer attached table two for all years depreciation.

3. Activity based depreciation is whereby an asset is depreciated based on the asset’s activity such as the number of hours worked or the number of units produced, during a particular period of time. Activity based depreciation per year is calculated as:

[(Cost - Salvage value) x activity performed during the period] / Total estimated life activity of the asset

Please refer attached table three for all years depreciation.

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