Question

On Jan 2, 2018, Sandstone Enterprises purchased equipment for $129,200. The equipment has a useful life of four years or of 13,000 working hours and after the useful life it will have a residual value of $13,500. The machine was used for 1,900 hours in 2018, 2,800 hours in 2019; 3,700 hours in 2020.

Required:

1. Calculate the depreciation expense for 2018 and 2019 under each of the following methods:

1. Straight-line,
2. Double diminishing-balance, and
3. Units-of -production

2. Record the journal entry for depreciation expense for the year ended December 31, 2018 under the straight-line method. (2 marks)
3. Which method results in the lowest profit for the first two years? Why?

Answer 1

Depreciation expense under Straight line method = (Cost - Residual value) / Estimated useful life

= ($129,200 - $13,500) / 4

= $28,925

Depreciation expense for 2018 = $28,925

Depreciation expense for 2019 = $28,925

Depreciation expense under Double diminishing balance method = (Cost - Accumulated depreciation) / Useful life*2

Depreciation expense for 2018 = ($129,200 - $0) / 4 * 2

= $64,600

Depreciation expense for 2019 = ($129,200 - $64,600) / 4 * 2

= $32,300

Depreciation under units of production method = (Cost - Residual value) * Hours used / Total estimated hours

Depreciation expense for 2018 = ($129,200 - $13,500) * 1,900 / 13,000

= $16,910

Depreciation expense for 2019 = ($129,200 - $13,500) * 2,800 / 13,000

= $24,920

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JOURNAL ENTRY

December 31, 2018	Depreciation expense	$28,925
	Accumulated depreciation		$28,925

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Double diminishing balance method results in lowest profit for the first 2 years due to high depreciation expense.