Duluth Ranch, Inc. purchased a machine on January 1, 2018. The cost of the machine was $35,000. Its estimated residual value was $11,000 at the end of an estimated 5-year life. The company expects to produce a total of 20,000 units. The company produced 1,300 units in 2018 and 1,750 units in 2019. Required:
a. Calculate depreciation expense for 2018 and 2019 using the straight-line method.
b. Calculate the depreciation expense for 2018 and 2019 using the units-of-production method.
c. Calculate depreciation expense for 2018 through 2022 using the double-declining balance method.

Duluth Ranch, Inc.

a. Depreciation Expense for 2018 and 2019, using the straight-line method:

2018: $24,000/5 = $4,800

2019: $24,000/5 = $4,800

b. Depreciation Expense for 2018 and 2019, using the units-of-production method:

2018 = 1,300 x $1.20 = $1,560

2019 = 1,750 x $1.20 = $2,100

c. Depreciation Expense for 2018 through 2022, using the double-declining balance method:

Depreciation Rate = 100%/5 x 2 = 40%

           Beginning Bal.  Depreciation                   Declining balance

2018:     $35,000    $14,000 ($35,000 x 40%)  $21,000 ($35,000 - 14,000)

2019:     $21,000      $8,400 ($21,000 x 40%)   $12,600 ($21,000 - $8,400)

2020:   $12,600      $1,600 ($12,600 x 40%)*    $11,000 ($12,600 - $1,600)

2021:    $11,000          $0

2022:  $11,000           $0

*NB: The calculated depreciation expense for 2020 is $5,040.  But, the balance after depreciation must not be below the residual value.  So, only the difference is expensed.

Explanation:

a) Data and Calculations:

Cost of machine =      $35,000

Residual value =             11,000

Depreciable amount $24,000

Useful life = 5 years

Straight-line depreciation per year = $24,000/5 = $4,800

Expected production unit = 20,000

Depreciation rate per unit = $24,000/20,000 = $1.20

b) The straight-line method of depreciation simply divides the depreciable amount ($24,000) by the useful life of 5 years to determine a straight-line depreciation expense of $4,800 per year.

c) The unit-of-production method calculates the depreciation rate per unit (Depreciable amount divided by total expected production units) and applies this rate, $1.20, to the total units produced in each period to determine the depreciation expense.

d) The double-declining balance method divides 100% by the useful life of the asset and then multiplies this 2, to obtain the depreciation rate.  This rate is then applied to the cost and declining balance each year.  The double-declining balance method, initially does not take into cognizance the residual value of the asset.  It only considers this salvage value towards the end when it adjusts the depreciation charge for the last year so that the declined balance will equal to the residual value.

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