On January 1, 2021, the Allegheny Corporation purchased equipment for $115,000. The estimated service life of the equipment is 10 years and the estimated residual value is $5,000. The equipment is expected to produce 220,000 units during its life. Calculate depreciation for 2021 and 2022 using each of the following methods. Round all computations to the nearest dollar.

1. Straight line

2. Double-declining balance

3. Units of production (units produced in 2021, 30,000; units produced in 2022, 25,000)

1. $11,000 each year

2. $23,000 and $18,400

3. $15,000 and $12,500

Explanation:

The calculation of the depreciation expense for the 2021 and 2022 is shown below:

1. Straight-line method:

= (Purchase value of equipment - estimated residual value) : (estimated service life)

= ($115,000 - $5,000) : (10 years)

= ($110,000) : (10 years)

= $11,000

In this method, the depreciation is same for all the remaining useful life i. e for 2021 also the same depreciation is applied i. e $11,000

2. Double-declining balance method:

First we have to determine the depreciation rate which is

= One : estimated service life

= 1 : 10

= 10%

Now the rate is double So, 20%

In year 1, the original cost is $115,000, so the depreciation is $23,000 after applying the 20% depreciation rate

And, in year 2, the $ (115,000 - $23,000) * 20% = $18,400

3. Units-of-production method:

= (Purchase value of equipment - estimated residual value) : (estimated production units)

= ($115,000 - $5,000) : ($220,000 units)

= ($110,000) : (220,000 units)

= $0.5 per units

For 2021, it would be

= Production units in 2021 year * depreciation per unit

= 30,000 units * $0.5

= $15,000

Now for the 2022, it would be

= Production units in 2022 year * depreciation per unit

= 25,000 units * $0.5

= $12,500