Carla Vista Limited purchased a machine on account on April

Carla Vista Limited purchased a machine on account on April 2, 2018, at an invoice price of $393,310. On April 4, it paid $1,900 for delivery of the machine. A one-year, $3,720 insurance policy on the machine was purchased on April 5. On April 18, Carla Vista paid $7,210 for installation and testing of the machine. The machine was ready for use on April 30.

Carla Vista estimates the machine’s useful life will be five years or 6,391 units with a residual value of $83,610. Assume the machine produces the following numbers of units each year: 907 units in 2018; 1,481 units in 2019; 1,427 units in 2020; 1,379 units in 2021; and 1,197 units in 2022. Carla Vista has a December 31 year end.

Carla Vista Limited purchased a machine on account on April 2, 2018, at an invoice price of $393,310. On April 4, it paid $1,900 for delivery of the machine. A one-year, $3,720 insurance policy on the machine was purchased on April 5. On April 18, Carla Vista paid $7,210 for installation and testing of the machine. The machine was ready for use on April 30. Carla Vista estimates the machine’s useful life will be five years or 6,391 units with a residual value of $83,610. Assume the machine produces the following numbers of units each year: 907 units in 2018; 1,481 units in 2019; 1,427 units in 2020; 1,379 units in 2021; and 1,197 units in 2022. Carla Vista has a December 31 year end.

Solution

1) Year Opening carrying Amount Depreciation Accumulated Depreciation Carrying Amount

2018 406140 406140*40%* 8/12=108304 108304 297836

2019 297836   297836 *40% = 119134 227438 178702

2020 178702 178702 * 40% =71481 298919 107221

2021 107221 107221 * 40% = 42888 341807 64333

2022 64333 (19277) 322530 $83,610

Note:- Cost of assets = $393,310 + $1,900 + $3,720 +$7,210

=406140

Depreciation rate = 1 / straight line rate * 2

= 1 / 5 * 2

= 40%

2)

Year Units of production Depreciation expense Accumulated Depreciation Carrying Amount

2018 907   $50.47 *907 =45776    45776 360364

2019 1,481 $50.47 *1481 =74746 120522 285618    

2020   1,427 72021 192543 213597

2021 1,379 69598 262141 143999

2022   1,197 60413 322554 83586

Note:- Depreciation per unit = [406140 - $83,610] / 6,391 units

= 322830 / 6391

= $50.47 per unit

3) Double declining balance method will result in lower net income in early years of assets life