Question

Comparing three depreciation methods

Dexter Industries purchased packaging equipment on January 8 for $86,900. The equipment was expected to have a useful life of three years, or 20,000 operating hours, and a residual value of $6,900. The equipment was used for 8,640 hours during Year 1, 6,710 hours in Year 2, and 4,650 hours in Year 3.

	Required:
1.	Determine the amount of depreciation expense for the three years ended 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. (Note: For STRAIGHT-LINE ONLY, round the first two years to the nearest whole dollar, then round the third year as necessary. For DECLINING BALANCE ONLY, round the multiplier to five decimal places. Then round the answer for each year to the nearest whole dollar.)
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

SLM
Cost of Machine	86,900.00
Salvage Value	6,900.00
Life in years	3.00
Particulars	Year 1	Year 2	Year 3
Opening Balance	86,900.00	60,233.00	33,566.00
Depreciation = (86,900 - 6,900)/3	26,667.00	26,667.00	26,666.00
Closing balance	60,233.00	33,566.00	6,900.00
Units of Activity
Cost of Machine	86,900.00
Salvage Value	6,900.00
Life in operating hours	20,000.00
Depreciation per hour = (86,900 - 6900)/20000	4.00
Particulars	Year 1	Year 2	Year 3
Opening Balance	86,900.00	52,340.00	25,500.00
Hours of production	8,640.00	6,710.00	4,650.00
Depreciation = Hours * 4	34,560.00	26,840.00	18,600.00
Closing balance	52,340.00	25,500.00	6,900.00
Life	5 Years
Double decling balance method rate = 1/3*2	66.666670%
Particulars	Year 1	Year 2	Year 3
Opening Balance	86,900.00	28,967.00	9,656.00
Depreciation at 66.66667%	57,933.00	19,311.00	2,756.00
Closing balance	28,967.00	9,656.00	6,900.00
2)
Double delcining method yields higher depreciation for year 1
3)
All method yield equl depreciation as depreciation is restriced to $80,000 as 6,900 being salvage value