Question

Linh purchased a boat at a cost of $12 000. The boat has an estimated residual value of $2 000 and an estimated life of five years, or 100 000 hours of operation. The boat was purchased on 1 July 2017, and was used 27 000 hours in 2017/18 and 26 000 hours in 2018/19.

What method of depreciation will maximise depreciation expense in 2017/18?

Group of answer choices

Reducing Balance

Unit of Activity

Straight-line

All methods produce the same depreciation expense for the year 2017/2018

Answer 1

The correct answer to this question will be option (b) Unit of activity. Unit of activity method of depreciation will maximize depreciation expense in 2017/18 because of the following calculation:

={($12,000-$2,000)*27,000}/100,000

={($10,000)*27,000}/100,000

=$2,700

Option (a) is not correct because of the following calculation:

Depreciation factor=1/ Estimated life of the asset

=1/5

=20%

Depreciation under Reducing balance method=(Cost - Salvage value)*Depreciation factor

=($12,000-$2,000)*20%

=$10,000*20%

=$2,000

It is lower than that of unit of activity method of depreciation.

Option (c) is not correct because of the following calculation:

Depreciation factor=1/ Estimated life of the asset

=1/5

=20%

Depreciation under Straight-line method=(Cost - Salvage value)*Depreciation factor

=($12,000-$2,000)*20%

=$10,000*20%

=$2,000

It is lower than that of unit of activity method of depreciation.

Option (d) is not correct because there are different answers of Unit of activity method of depreciation and Reducing Balance method of depreciation or Unit of activity method of depreciation and Straight-line method of depreciation.