A company purchased a machine on January 1 of the current year for $750,000. Calculate the annual depreciation expense for each year of the machine's life (estimated at 5 years or 20,000 hours, with a salvage value of $75,000). During the machine's 5-year life its hourly usage was: 3,000; 4,000; 5,000; 5,000; and 3,000 hours.
A company purchased a machine on Jan 1 of the current year of $750
Calculate the annual depreciation expense for each year of the machine's life
(estimated at 5 years or 20,000 hours, with a residual value of $750000) During the machine's 5 years life its hourly usage was : 5000 : 3000 : 4000 : 2000 and 6000 hours
To calculate the annual depreciation expense for each year of the machine's life, you will need to use the units of production depreciation method. This method calculates depreciation based on the usage or hours of the machine.
Here are the steps to calculate the annual depreciation expense for each year:
Step 1: Calculate the total expected usage or hours over the machine's life.
- Add up the total hours of the machine's life: 3,000 + 4,000 + 5,000 + 5,000 + 3,000 = 20,000 hours
Step 2: Calculate the depreciation per hour.
- Calculate the depreciable cost, which is the cost of the machine minus the salvage value: $750,000 - $75,000 = $675,000
- Divide the depreciable cost by the total expected usage: $675,000 / 20,000 hours = $33.75 per hour
Step 3: Calculate the annual depreciation expense for each year.
- Multiply the depreciation per hour by the hours used in each year.
Year 1: $33.75/hour × 3,000 hours = $101,250
Year 2: $33.75/hour × 4,000 hours = $135,000
Year 3: $33.75/hour × 5,000 hours = $168,750
Year 4: $33.75/hour × 5,000 hours = $168,750
Year 5: $33.75/hour × 3,000 hours = $101,250
Therefore, the annual depreciation expense for each year of the machine's life would be:
Year 1: $101,250
Year 2: $135,000
Year 3: $168,750
Year 4: $168,750
Year 5: $101,250
To calculate the annual depreciation expense for each year of the machine's life, we need to use the units of production method. This method calculates depreciation based on the actual usage of the machine in hours. Here are the steps:
Step 1: Calculate the total expected production hours over the machine's life.
Total expected production hours = 3,000 + 4,000 + 5,000 + 5,000 + 3,000 = 20,000 hours
Step 2: Calculate the depreciation cost per hour.
Depreciation cost per hour = (Purchase cost - Salvage value) / Total expected production hours
Depreciation cost per hour = ($750,000 - $75,000) / 20,000 = $675,000 / 20,000 = $33.75
Step 3: Calculate the annual depreciation expense for each year based on the actual usage in hours.
Year 1: Annual depreciation expense in Year 1 = Depreciation cost per hour * Actual usage in Year 1
Annual depreciation expense in Year 1 = $33.75 * 3,000 = $101,250
Year 2: Annual depreciation expense in Year 2 = Depreciation cost per hour * Actual usage in Year 2
Annual depreciation expense in Year 2 = $33.75 * 4,000 = $135,000
Year 3: Annual depreciation expense in Year 3 = Depreciation cost per hour * Actual usage in Year 3
Annual depreciation expense in Year 3 = $33.75 * 5,000 = $168,750
Year 4: Annual depreciation expense in Year 4 = Depreciation cost per hour * Actual usage in Year 4
Annual depreciation expense in Year 4 = $33.75 * 5,000 = $168,750
Year 5: Annual depreciation expense in Year 5 = Depreciation cost per hour * Actual usage in Year 5
Annual depreciation expense in Year 5 = $33.75 * 3,000 = $101,250
Therefore, the annual depreciation expense for each year of the machine's life is as follows:
Year 1: $101,250
Year 2: $135,000
Year 3: $168,750
Year 4: $168,750
Year 5: $101,250