Question

Perdue Company purchased equipment on April 1 for $82,620. The equipment was expected to have a useful life of three years, or 5,940 operating hours, and a residual value of $2,430. The equipment was used for 1,100 hours during Year 1, 2,100 hours in Year 2, 1,800 hours in Year 3, and 940 hours in Year 4. Required: Determine the amount of depreciation expense for the years ended December 31, Year 1, Year 2, Year 3, and Year 4, by (a) the straight-line method, (b) units-of-output method, and (c) the double-declining-balance method.

Answer 1

(a) Straight line method :

Depreciation per year = (Actual cost – Residual Value) / Useful life of equipment

= (82620 – 2430) / 3

= $ 26730

Depreciation Schedule
Date	Depreciation Amount ($)
Dec. 31, Year1	26730
Dec. 31, Year2	26730
Dec. 31, Year3	26730
Dec. 31, Year4	NIL

(b) Units of Output Method :

Depreciation for Dec. 31, Year 1

= {(Actual Cost – Residual Value) / total operating hours in entire life of equipment} * Operating hours in year 1

= {(82620 – 2430) / 5940} * 1100

= 13.5 * 1100

= $ 14850

Depreciation for Dec. 31, Year 2

= {(Actual Cost – Residual Value) / total operating hours in entire life of equipment} * Operating hours in year 2

= {(82620 – 2430) / 5940} * 2100

= 13.5 * 2100

= $ 28350

Depreciation for Dec. 31, Year 3

= {(Actual Cost – Residual Value) / total operating hours in entire life of equipment} * Operating hours in year 3

= {(82620 – 2430) / 5940} * 1800

= 13.5 * 1800

= $ 24300

Depreciation for Dec. 31, Year 4

= {(Actual Cost – Residual Value) / total operating hours in entire life of equipment} * Operating hours in year 4

= {(82620 – 2430) / 5940} * 940

= 13.5 * 940

= $ 12690

(c) Double Declining balance Method :

Depreciation Schedule
Year	Calculation of Opening Value of Asset	Opening Value($)	Depreciation Percent	Depreciation Amount($)	Closing Value of Asset (= opening Value - Depreciation)($)
Dec. 31, Year 1	Initial Cost	82620	66.6667%	55080	27540
Dec. 31, Year 2	Closing Value of Year 1	27540	66.6667%	18360	9180
Dec. 31, Year 3	Closing Value of Year 2	9180	66.6667%	6750	2430

Note :

1. Depreciation Percent

= [{(Actual Cost – Residual Value) / Useful Life of Asset} / Actual cost ]* 2

= [{(82620 – 2430) / 3} / (82620 – 2430)] * 2

= [26730 / 80190] * 2

= 66.6667%

1. Closing Value of Equipment (asset) of Year 3 is the residual value of Equipment = $ 2430
2. Depreciation Amount = Opening Value of the year * Depreciation Percent
3. Depreciation Amount of Year 3

= (Opening Value of the year3 * Depreciation Percent) + Adjustment of Closing Value

= (Opening Value of the year * Depreciation Percent)

+ [{opening Value of Year 3 – (Opening Value of the year * Depreciation Percent)} - Closing Value of Asset of Year 3]

= (9180 * 66.6667%)

+ [{9180 – (9180 * 66.6667%)} - 2430]

= 6120 + [{9180 – 6120} - 2430]

= 6120 + 630

= $ 6750