Question

Print item Comparing three depreciation methods Dexter Industries purchased packaging equipment on January 8 for $72,000. The equipment was expected to have a useful life of three years, or 18,000 operating hours, and a residual value of $4,500. The equipment was used for 7.500 hours during Year 1, 6,000 hours in Year 2, and 4400 hours in Year 3. Required: 1. Determine the amount of depreciation expense for the three years ending December 31, by (a) the straight line method, (b) the units-of- activity method, and the double-declining-balance method. Also determine the total depreciation expense for the three years by each method. Round the final answers for each year to the nearest whole dollar Depreciation Expense Year Straight-Line Method Units-of-Activity Method Double Declining-Balance Method Year 2 Year Total 2. What method yields the highest depreciation expense for 3. What method vields the most deprecation over the three-year fe of the count

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Answer 1

Solution Cost of equipment Residual value Depreciable cost ($72,000 - $4,500) Useful life (in years) Useful life (in operating hours) $72,000 $4,500 $67,500 3 Years 18,000 hours (a) Straight line-method Depreciation per year - Depreciable cost / useful life = $67,500/3 years = $22,500 Depreciation for Year 1 = Depreciation for Year 2 = Depreciation for Year 3 = $22,500 $22,500 $22,500 (Note: The equipment was purchased on 8th January. While calculating the depreciation in Year 1, 8 days have been ignored. (b) Units-of-activity method In this method, depreciation is calculated based on the actual activity of the asset during the year. Depreciation for the year Depreciable Cost x Actual hours used Useful life (in hours) Depreciation for Year 1 ($67,500 x 7,600/18,000) Depreciation for Year 2 ($67,500 x 6,000/18,000) Depreciation for Year 3 ($67,500 x 4,400/18,000) $28,500 $22,500 $16,500 (c) The double-declining-balance method Straight-line Depreciation rate = 100%/3 Double decline depreciation rate (33.33% x 2) 33.33% 66.67%

Year WDV Depreciation $72,000 x 66.67% = $24,000 x 66.67% = Lower of ($8,000 x 66.67%) or ($8,000 - $4,500) = $48,000 $16,000 $3,500 $24,000 $8,000 $4,500 (*) In year 3, the depreciation expense as per double decline rate works out to be $5,333, which shall be restricted to the extant that WDV after charging the depreciation does not go below the residual value ($4,500). Requirement 1 Year Straight-Line Method Units-of-Activity Double-Declining Method Balance Method 2 $22.500 $22,500 $22,500 $67,500 $28,500 $22,500 $16,500 $67,500 $48,000 $ 16,000 $3,500 $67,500 Total Requirement 2: Double-declining-balance method yields the highest depreciation expense for Year 1. Requirement 3: All three depreciation methods yields the equal depreciation over the three- year life of the equipment.