Required information [The following information applies to the questions displayed below.] Ramirez Company installs a computerized manufacturing machine in its factory at the beginning of the year at a cost of $83,600. The machine's useful life is estimated at 20 years, or 398,000 units of product, with a $4,000 salvage value. During its second year, the machine produces 33,800 units of product. Determine the machine's second-year depreciation and year end book value under the straight-line method.

 

Answer:

Calcuation of Depreciation under the Straight Line Method

Cost of the computerized manufacturing machine installed by Ramirez Company in the beginning is $83,600

Machine’s useful life = 20 years

Salvage value = $4000

Depreciation is the gradual and permanent decrease in the value of the asset due to normal wear and tear, obsolescene etc.

Depreciation under Straight Line Method:

Under straight line method cost of the asset is written off equally every year during its useful life i.e. equal amount of depreciation is charged every year.

            Annual Depreciation Expense       = Cost of the asset – Salvage value

                                                                                 Machine’s Useful life

                                                                      = $83,600 - $4000

                                                                                    20

                                                                      =   $3980

Therefore, this Depreciation expense of $3,980 will be charged every year till the useful life of the machine.

Straight Line Method

Therefore Machine’s second year depreciation will be $3,980

Year end book value (Year 2) = Value of asset at the beginning of Year 2 – Depreciation Expense

                                                     = $79,620 - $3,980

                                                     = $75,640