A machine costing $212,600 with a four-year life and an estimated $17,000 salvage value is installed in Luther Company's factory on January 1. The factory manager estimates the machine will produce 489,000 units of product during its life. It actually produces the following units: 122,800 in Year 1, 122,900 in Year 2, 120,500 in Year 3, 132,800 in Year 4. The total number of units produced by the end of Year 4 exceeds the original estimate-this difference was not predicted. (The machine cannot be depreciated below its estimated salvage value.) Required:
Compute depreciation for each year (and total depreciation of all years combined) for the machine under each depreciation method. (Round your per unit depreciation to 2 decimal places. Round your answers to the nearest whole dollar.)

From the question, we have:

Depreciable amount = Machine cost – Salvage value = $212,600 - $17,000 = $195,600

We use 2 relevant depreciation methods as follows:

1. Straight line depreciation method

Straight line depreciation rate = 1 / Estimated useful life = 1 / 4 = 0.25 or 25%

Depreciation for each year = Depreciable amount * Straight line depreciation rate ………. (1)

Using equation (1), we have:

Depreciation for Year 1 = N195,600 * 25% = $48,900

Depreciation for Year 2 = N195,600 * 25% = $48,900

Depreciation for Year 3 = N195,600 * 25% = $48,900

Depreciation for Year 4 = N195,600 * 25% = $48,900

Therefore, we have:

Total depreciation of all years combined = Depreciation for Year 1 + Depreciation for Year 2 + Depreciation for Year 3 + Depreciation for Year 4 = $48,900 + $48,900 + $48,900 + $48,900 = $195,600

2. Units-of-production method

Expected unit of production = 489,000 units

Depreciation rate = Depreciable amount / Expected unit of production = $195,600/ 489,000 = $0.40

Depreciation for each year = Unit produced for the year * Depreciation rate ………..(2)

Using equation (1), we have:

Depreciation for Year 1 = 122,800 * $0.40 = $49,120

Depreciation for Year 2 = 122,900 * $0.40 = $49,160

Depreciation for Year 3 = 120,500 * $0.40 = $48,200

Since it is stated in the question that the machine cannot be depreciated below its estimated salvage value, this therefore implies that:

Depreciation for Year 4 = Depreciable amount - Depreciation for Year 1 - Depreciation for Year 2 - Depreciation for Year 3 = $195,600 - $49,120 - $49,160 - $48,200 = $49,120

Therefore, we have:

Total depreciation of all years combined = Depreciation for Year 1 + Depreciation for Year 2 + Depreciation for Year 3 + Depreciation for Year 4 = $49,120 + $49,160 + $48,200 + $49,120 = $195,600

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Luther Company

Depreciation expense for each year:

a1) Straight line method:

= $195,600/4

= $48,900

a2) Total Depreciation = $195,600 ($48,900 x 4)

b1) Production unit method:

Depreciation rate = $195,600/ 489,000

= $0.40 per unit

Year 1 = 122,800 x $0.40 = $49,120

Year 2 = 122,900 x $0.40 = $49,160

Year 3 = 120,500 x $0.40 = $48,200

Year 4 = 132,800 x $0.40 = $53,120 but cannot exceed $49,120, so it equal to $49,120

a2) Total Depreciation = $195,600 ($49,120 + 49,160 + 48,200 + 49,120)

Explanation:

a) Data and Calculations:

Cost of machine = $212,600

Salvage value             17,000

Depreciable value $195,600

Useful life = 4 years

Estimated production unit = 489,000 units

b) Using the straight-line method, Luther Company depreciates the asset with the same amount of calculated depreciation.  This is calculated by dividing the depreciable amount of the asset by the number of years the asset will be put to use.  The production unit method uses an estimate of the total production units to divide the depreciable amount.  The depreciation rate obtained is applied to the number of units produced each year to ascertain the year's depreciation expense.