 Hello in this lecture we will take a look at a problem working depreciation using the units of production. We have previously worked the same numbers using the straight line method, the double declining method and now we'll move on and compare and contrast the units of production method. We'll be using the same numbers. These numbers over here will plug them into this worksheet here and calculate the depreciation. We will then put them into this worksheet that will show the depreciation per year being four years in this case and we will calculate of the book value so we can see it all in one place then we'll see the journal entry then we want to see what the journal entry will do to the trial balance within context of other accounts. So we're going to drill down on the depreciation calculation in this case. So we're going to have the units of production method. We have the same starting data being equipment cost here being the 257 estimated salvage value 20,000 what is salvage value that's what we believe the equipment will be worth at the end of the useful life what is the useful life in this case four years useful life being how long we believe this product or this equipment will be in service for for us and at the end of it even if it's totally scrapped if it's like a forklift or something like that we believe that we can scrap it for something so it still has value even though it may not be in use or we're estimating that it will not be in use after that four-year time period that value being the salvage value of 20,000. So now we have the estimated units of production over the useful life of the equipment now this is not data that we used for the prior methods this is data that we will use for the units of production method note that if we're able to apply depreciation in this way it might be more accurate similar to if we were to depreciate a car it might be more accurate for us to depreciate based on the mileage driven rather than how old the car is that could be a more accurate way and usually most people would think that it would be but of course then you have to track the miles you'd have to know how many miles you believe the car will drive in the beginning and then track how many miles has been driven and calculate the depreciation of decline in the value in that way in this case we're going to attempt to do that we're going to see what this machine does what it does is it produces units of goods so we're going to say it produces over its life we're going to make 400 475 thousand estimated units with this machine that's the life of the machine similar to a time frame of the machine if we were to say it's going to live for four years now in this case we happen to be in the same four year period but we don't need to know it's going to live for four years necessarily we just need to know the total amount of units in this case that will be produced and then it's going to give us the units per year we're going to have to count them first year has 220 units then second year 224 6 and then third year 221 8 and fourth 15 two and we do not want to go below once again the salvage value being the 20 000 so let's see how we can calculate using the units of production we're going to start off with the same cost that cost being 257 5 that is the first number in our problem then we're going to subtract out the salvage value i'm going to say less i'll type it out so that we can see it is a subtraction problem problem and that will be 20 000 and if we subtract that out that will give us the amount that will be depreciated over the useful life i'm going to try to use our underlines here i'm going to go over here i'm going to go to the home tab we're going to go to the fonts i'm going to go to the underline i'm going to single underline that to show that we're going to do a subtraction problem i'm going to do the problem with a formula by selecting the equals line pointing to the 257 5 minus then pointing to the 20 000 and enter so that means that over the useful life we will depreciate 237 5 bringing the value from the cost of this down by 237 5 which will leave us with an ending value of 20 being the salvage value that we can scrap it for then we're going to divide that by the estimated unit of production so i'm going to indicate that with the slash being the dividing from the computer and it's going to be the estimated useful life for the for units produced over the life of this product and we're going to get that here so over the life of the machine it's going to produce 475 000 units we're going to divide that out i'm going to go ahead and go to the home tab font group underline that and that will give us then the depreciation per unit so once again i'm going to indicate that with the equal sign here depreciation per unit and i'm going to divide that out by selecting the equal sign pointing to the 237 5 amount to be depreciated over the life divided by the number of units that will be produced over the life and enter and note that we have a decimal here it's uh that basically means it's going to be 50 cents per unit and the reason it has a decimal and these do not is because if we went to the home tab and we went to the numbers group we added decimals to this cell if it does not show decimals oftentimes you want to play with the number of decimals there to see if the number is rounded or not within excel all right so now that we have that it's pretty simple calculation in order for us to calculate the depreciation per year we're going to start off with the units that will be produced in year one and they're going to have to give us that if we're using units of production they will have to provide that in the problem in this case we're going to put produce or we have produced 220 000 units in year one so we're just going to type in 220 000 and then we're going to multiply that times the depreciation per unit so i'm going to instigate of course the times with the x asterix here and then we're going to put our cursor over here and the depreciation per unit that's what we calculated to be 50 cents per unit i'm going to just click on that and there's the 50 cents once again it's rounded note that the cell reference here or the cell type format is different than the cell and that is because it is showing decimals all right and then we're going to multiply that out so that will equal depreciation for the year one so i'm going to put my cursor in c 68 and say equals and point to the 220 000 times the 50 cents per unit being produced that means we're going to depreciate it by 110 000 if we put that information into our table up here it would look like this the depreciation for year one is going to equal the 110 000 then we're going to calculate the book values the book value is calculated by the cost the cost being the 257 5 that's what we paid for it does not change and then we're going to subtract from that the accumulated depreciation the depreciation over the the life of the machine up to this point which is just one year so it's the same as the depreciation in this case we're going to subtract that out i'm going to select equals point to the cost the 257 5 minus the accumulated depreciation 110 and enter that'll give us a book value of 147 5 let's look at that in terms of a journal entry remember that in prior classes we have seen the journal entry in the adjusting process but the book has given us that number now we're calculating that number and let's put it into the same journal entry that we would do in the prior classes being that this will be our trial balance for year one we just have a couple numbers so that we can see this within context we got the assets in green we've got the equipment which of course is on the books now of the 257 5 that's how much we paid for the equipment we've got our liabilities here and the equity and income and minus the depreciation being the only expense that we will be using here so we could see the effect on net income the debits minus the credits are zero and we're assuming income of 100 000 being a credit of 100 000 so if we record the depreciation then the depreciation be 110 and we will then credit 110 the effect on the financial statements then the depreciation expense will go up cumulative depreciation will go up in the credit direction the book value now of the equipment it's on the books of what we bought it for less the accumulated depreciation the debit minus the credit is the book value 147 5 which is what we calculated over here the depreciation expense is 110 and note that gives us a loss of 10 000 here now if we compared that to the prior formats in the double declining we have a larger loss in the double declining and in the straight line we actually had a gain on the income so this is kind of in the middle in reality we don't really know where this is going to be because it just really depends on how much we use the machine from year to year it is a logical assumption that we would use it and it would be more efficient in the first years than in later years so it may be a bit front loaded in a similar fashion as the double declining method so now we're going to calculate the same for year two it's going to be the exact same calculation so we're going to have the units for year two and how many did we produce they're going to have to give it to us it's the two 124 6 124 6 just like in your car we're just going to count that if we were going to count the mileage for the year in the car we're just going to count the number of units that were produced and that we're going to multiply that times the depreciation per unit which is 50 50 cents which we calculated up here so 50 cents and then that will equal the depreciation say that will equal depreciation for year two so I'm going to multiply that out so I'm going to sell c 72 I'm going to say equals the 124 6 times the 50 cents per unit and depreciation for year two 62 3 so same idea up here we're going to put that into our worksheet so for year two we have depreciation that we have now calculated of 62 3 the cost is the same the cost has not changed so the cost is 257 5 that's what we paid for it the accumulated depreciation now is the accumulated depreciation over the life so that's going to be the prior year's depreciation accumulated depreciation I should say plus the current year's depreciation expense so it's going to equal the prior year's accumulated depreciation that's what we stand before this year plus the depreciation expense we can also think of it as all the depreciation expense over the life which of course is the same number of 172 3 then we're going to subtract out we're going to calculate the book value by saying this equals the cost 257 5 minus I'm going to point to the accumulated depreciation 270 172 3 and enter book value 85 2 which of course has gone down from the prior year because it has depreciated in value if we're going to take a look at our journal entry over here then we are now moving from year one to year two notice what happens when we move from year one to year two we're going to assume that the net income of loss in this case has closed out to the capital accounts and now the capital account consists of all the blue numbers the beginning capital plus revenue less the expenses are in this number we're going to assume that we made another hundred thousand in the second year so this isn't the same hundred thousand this is another hundred thousand that we assume we earned in year two we have currently on the books the 257 5 and the accumulated depreciation of 110 we're going to have the same journal entry being the expense is going to go up by in this case the 62 3 that we calculated and the accumulation accumulated depreciation will be credited by the 62 3 in this case credits are being represented with brackets and if we take a look at that then we have the cost being the same the amount that we have accumulated depreciation being the 172 3 now going up from the 110 by the 62 3 that means that the book value is a net debit of 85 2 which equals our book value over here on our table and we can see that the depreciation is 62 3 we can see that depreciation went down which means that net income actually went up so we had a loss last year and now we have a gain of 37 7 and once again that depreciation is being calculated based on the number of units that are being produced so now let's take a look at the third years we're going to have the same calculation for year three so we're going to have the units produced in year three and they're going to have to give us that so that's going to be the 121 8 128 and then we're going to have times the depreciation per unit and so that will be the same number that's going to be the 50 cents per unit and that will equal the depreciation for year three so we're going to multiply that out of them and sell c 76 we're going to say equals we're going to point to the 121 8 units produced in year three times the 50 cents per unit year three has 60 900 that we will then depreciate going to go ahead and put that into our table up top so depreciation for year three now is going to be this 60 9 and enter so we can see the depreciation is going down it went down slightly from this year to the next then we're going to say the cost is going to be the same that does not change that's what we bought it for the accumulated depreciation could then be the prior year's accumulated depreciation plus the currently year's depreciation expense or you can think of it as the sum of all depreciation over the life up until this time being 233 2 then we're going to subtract this out to calculate the book value the book value value is calculated as 257 5 less the 233 2 or the cost less the accumulated depreciation giving a book value of 24 300 all right so we're going to post that out once again to