Question

Comparing Three Depreciation Methods

Dexter Industries purchased packaging equipment on January 8 for $490,800. The equipment was expected to have a useful life of three years, or 5,700 operating hours, and a residual value of $40,500. The equipment was used for 2,280 hours during Year 1, 1,767 hours in Year 2, and 1,653 hours in Year 3.

Required:

1. Determine the amount of depreciation expense for the three years ending December 31, Year 1, Year 2, Year 3, by (a) the straight-line method, (b) the units-of-activity method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the three years by each method.

Note: For all methods, round the answer for each year to the nearest whole dollar.

Depreciation Expense
Year	Straight-Line Method		Units-of-Activity Method		Double-Declining-Balance Method
Year 1	$		$		$
Year 2	$		$		$
Year 3	$		$		$
Total	$		$		$

2. What method yields the highest depreciation expense for Year 1?

3. What method yields the most depreciation over the three-year life of the equipment?

Answer 1

Answer:-1)-a)- Straight line Method:-

= Cost of asset- Salvage value of asset/No. of useful life (years)

=($490800-$40500)/3 years

=$200000/5 years = $150100

Year 1 depreciation =$150100

Year 2 depreciation =$150100

Year 3 depreciation =$150100

b)- Units of activity method-

Annual depreciation expense per hours=Cost – salvage /Total operating hours

                =($490800-$40500)/5700 hours =$ 79 per hour

Depreciation expense in year 1= Depreciation expense per hour*Operating hour in year 1

                                                =$ 79 per hour*2280 hours

                                                 =$180120

Depreciation expense in year 2= Depreciation expense per hour*Operating hour in year 2

                                                =$ 79 per hour*1767 hours

                                                 =$139593

Depreciation expense in year 3= Depreciation expense per hour*Operating hour in year 3

                                                =$ 79 per hour*1653 hours

                                                 =$130587

c)- Double Declining balance depreciation is calculated using the following formula:

Depreciation = Depreciation Rate * Book Value of Asset

Depreciation rate is given by the following formula:

Depreciation Rate = Accelerator *Straight Line Rate

Straight-line Depreciation Rate = 1/3 = 0.3333 = 33.33%
Declining Balance Rate = 2*33.33% = 66.67%

Depreciation 1^st year = $490800 *66.67% = $327216

Book value at end of 1^st year = $490800 – $327216 = $163584

Depreciation 2^nd year = $163584* 66.67% = $109061

Book value at end of 2^nd year = $163584 – $109061 = $54523

Depreciation 3^rd year = $54523-$40500 = $14023

2)-Double decline depreciation method yields the highest depreciation expense for Year 1.

3)-All three depreciation method are same over the three year life of the equipment.