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Iron Works, Inc. purchased a metal casting machine on January 1, 2014. The cost of the machine was $32,000. Its estimated residual value was $7,000 at the end of an estimated 10-year life. The company expects to produce a total of 20,000 units. a. Calculate depreciation expense for 2014 and 2015 using the straight-line method. b. Calculate depreciation expense for 2014 and 2015 using the double-declining balance method. c. Calculate the depreciation expense for 2014 and 2015 using the units-of-production method. The company produced 1,200 units in 2014 and 1,650 units in 2015. (Round your final answer to nearest dollar value.)

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Answer:

a. Depreciation expenses in 2014 and 2015 using straight-line method is the same for each year at $2,500

b. Depreciation expenses using double-declining balance method:

+ 2014: $6,400

+ 2015: $5,120

c. Depreciation expenses using units-of-production method:

+ 2014: $1,500

+ 2015: $2,062.5

Explanation:

a. Using straight-line method, the depreciation expenses will be the same for the 10 useful life of the asset which is calculated as: (Historical asset cost - estimated residual value) / useful life = (32,000 - 7,000) /10 = $2,500

b. Using declining balance method:

Depreciation in a year = 2 * Depreciation rate x Asset carrying value = 2 * (1/useful life) x Asset carrying value.

So, depreciation in 2014 = 2 x 1/10 x 32,000 = $6,400

      depreciation in 2015 = 2 x 1/10 x ( 32,000-6,400) = $5,120

c. Using the units-of-production method:

Depreciation expenses for a year will be equal [ (Historical cost - estimated residual value)/ Expected production capacity] x Production level during a year

So, depreciation in 2014 = (32,000-7,000)/20,000 x 1,200 = $1,500

      depreciation in 2015 = (32,000-7,000)/20,000 x 1,650 = $2,062.5