Question

Comparing Three Depreciation Methods

Dexter Industries purchased packaging equipment on January 8 for $306,000. The equipment was expected to have a useful life of three years, or 7,800 operating hours, and a residual value of $25,200. The equipment was used for 3,120 hours during Year 1, 2,418 hours in Year 2, and 2,262 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

			Amt. in $
Year	Straight Line Method	Units of activity method	Double Declining Balance Method
Year 1	93,600	1,12,320	2,04,000
Year 2	93,600	87,048	68,000
Year 3	93,600	81,432	22,667

Workings:-

Particuars	Amt. in $	Workings
Cost on January 8, Year 1	3,06,000
Salvage value	25,200
Useful life (in years)	3
Rate of depreciation	33.33%	(1/3*100)
Expected capacity (in hours)	7800
Hours used in Year 1	3120
Hours used in Year 2	2418
Hours used in Year 3	2262
Depreciation for Year 1 as per straight line method	93,600	(306000-25200)/3
Depreciation for Year 2 as per straight line method	93,600	(306000-25200)/3
Depreciation for Year 3 as per straight line method	93,600	(306000-25200)/3
Depreciation for Year 1 as per double declining method	2,04,000	(306000*33.33%*2)
Depreciation for Year 2 as per double declining method	68,000	(306000-204000)*(33.33%*2)
Depreciation for Year 3 as per double declining method	22,667	(306000-204000-68000)*(33.33%*2)
Depreciation for Year 1 as per units of activity method	1,12,320	(306000-25200)/7800*3120
Depreciation for Year 2 as per units of activity method	87,048	(306000-25200)/7800*2418
Depreciation for Year 3 as per units of activity method	81,432	(306000-25200)/7800*2262