Question

Comparing three depreciation methods

Dexter Industries purchased packaging equipment on January 8 for $57,600. The equipment was expected to have a useful life of three years, or 14,400 operating hours, and a residual value of $3,600. The equipment was used for 5,760 hours during Year 1, 4,320 hours in Year 2, and 4,320 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 (c) 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 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)-Depreciation for Year 1= $18000.

Depreciation for Year 2= $18000.

Depreciation for Year 3= $18000.

Explanation-Straight line Method- Annual Depreciation-

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

=($57600-$3600)/3 years

= $54000/3 years

= $18000

b)- Depreciation for Year 1= $21600.

Depreciation for Year 2= $16200.

Depreciation for Year 3= $16200.

Explanation- Units of activity method:-Annual depreciation expense per unit-

= (Cost – Salvage value) /Total operating hours

=($57600-$3600)/14400 hours

= $3.75 per hour

Depreciation expense in Year 1= Depreciation expense per hour* Hours used

= $3.75 per hour*5760 hours

= $21600

Depreciation expense in Year 2= Depreciation expense per hour* Hours used

= $3.75 per hour*4320 hours

= $16200

Depreciation expense in Year 3= Depreciation expense per hour* Hours used

= $3.75 per hour*4320 hours

= $16200

c)- Depreciation for Year 1= $88018.

Depreciation for Year 2= $73345.

Depreciation for Year 3= $61118.

Explanation- 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%
Double Declining Balance Rate = 33.33%*2 = 66.67%

Depreciation 1st year = $57600 *66.67% = $38402

Book value at end of 1st year = $57600 - $38402 = $19198

Depreciation 2nd year = $19198*66.67% = $12799

Book value at end of 2nd year = 19198 - $12799 = $6399

Depreciation 3rd year = $6399 - $3600 = $2799

Answer-2)- Double Declining balance method yields the highest depreciation expense for Year 1 of $38402.

Answer-3)- All three method yields the equal depreciation over the three-year life of the equipment of $54000.