Lecture Activity 1

Depreciation example:

Cost of Machine $22,000

Estimated residual value $2,000
Estimated useful life 4 years
Estimated units of total output 200,000 units
Units of output in the following years:
Year Units of output
1 20,000
2 60,000
3 80,000
4 40,000

REQUIRED:
1. Using the above information calculate the:
(a) Annual amount of depreciation for each of the four years using the straight-line method
of depreciation;
(b) Annual amount of depreciation for each of the four years using the reducing balance
method of depreciation (assume a fixed depreciation rate of 45%); and
(c) Annual amount of depreciation for each of the four years using the units of output
method of depreciation.

2. Show the effects for each of the 4 years on the Income Statement and Balance Sheet
extracts in the proformas provided:
(a) For the straight line method;
b) For the reducing balance method; and
c) For the units of output method.
1 (a) Annual amount of depreciation using straight-line = (22,000 2,000)/4 = $5,000

(b) Reducing balance

Cost Depreciation Accumulated Net book value
Depreciation
Year 1 22.000 22,000*0.45 = 9,900 9,900 22,000-9,900 = 12,100
Year 2 22.000 12,100*0.45 = 5.445 9,900+5.445 = 15,345 22,000-15,345 = 6,655
Year 3 22.000 6,655*0.45 = 2,995* 15,345+2,995 = 18,340 22,000-18,340 = 3,660
Year 4 22.000 3,660*0.45 = 1,647* 18,340+1,647 = 19,987 22,000-19,987 = 2,013
*rounded

c) Depreciation expense per unit will be:

($22.000-$2.000)/200,000 units = $0.1

Depreciation expense per year

Year Working Depreciation amount

($)
1 20,000 units * $0.1 2,000
2 60,000 units * $0.1 6,000
3 80,000 units * $0.1 8,000
4 40,000 units * $0.1 4,000
Accumulated depreciation at the end of 20,000
year 4
2 (a)

Income Statement - extract Year 1 Year 2 Year 3 Year 4

Sales xx xx xx xx
Less Cost of goods sold xx xx xx xx
Gross Profit xx xx xx xx
Less Expenses
Depreciation - machine 5,000 5,000 5,000 5,000
Net Profit xx xx xx xx

Balance Sheet - extract Year 1 Year 2 Year 3 Year 4

Non current assets
Machine 22,000 22,000 22,000 22,000
Less Accumulated Depreciation 5,000 10,000 15,000 20,000
Net book value Machine 17,000 12,000 7,000 2,000
2 (b)

Income Statement - extract Year 1 Year 2 Year 3 Year 4

$ $ $ $
Sales xx xx xx xx
Less Cost of goods sold xx xx xx xx
Gross Profit xx xx xx xx
Less Expenses
Depreciation - machine 9,900 5,445 2,995 1,647
Net Profit xx xx xx xx

Balance Sheet - extract Year 1 Year 2 Year 3 Year 4

$ $ $ $
Non current assets
Machine 22,000 22,000 22,000 22,000
Less Accumulated Depreciation 9,900 15,345 18,340 19,987
Net book value Machine 12,100 6,655 3,660 2,013
2 (c)

Income Statement - extract Year 1 Year 2 Year 3 Year 4

$ $ $ $
Sales xx xx xx xx
Less Cost of goods sold xx xx xx xx
Gross Profit xx xx xx xx
Less Expenses
Depreciation - machine 2,000 6,000 8,000 4,000
Net Profit xx xx xx xx

Balance Sheet - extract Year 1 Year 2 Year 3 Year 4

$ $ $ $
Non current assets
Machine 22,000 22,000 22,000 22,000
Less Accumulated Depreciation 2,000 8,000 16,000 20,000
Net book value Machine 20,000 14,000 6,000 2,000