Question

On Jan 2, 2017, Sandstone Enterprises purchased equipment for $129,200. The equipment has a useful life of four years or of 12,000 working hours and after the useful life it will have a residual value of $14,000. The machine was used for 1,900 hours in 2017, 2,800 hours in 2018; 3,700 hours in 2019.

Required:

1. Calculate the depreciation expense for 2017 and 2018 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, 2017 under the straight-line method.
3. Which method results in the lowest profit for the first two years? Why?

Answer 1

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

= ($129,200 - $14,000) / 4

= $28,800

2017 depreciation = $28,800

2018 depreciation = $28,800

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

2017 depreciation = ($129,200 - $0) / 4 * 2 = $64,600

2018 depreciation = ($129,200 - $64,600) / 4 * 2 = $32,300

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Depreciation under Units of production method = (Cost - Residual value) * Hours used in the year / Total estimated hours

2017 depreciation = ($129,200 - $14,000) * 1,900 / 12,000

= $18,240

2018 depreciation = ($129,200 - $14,000) * 2,800 / 12,000

= $26,880

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Lowest profit = Double diminishing balance method.

Why? Due to the high depreciation expense.