Question

I am stuck on this problem.

Comparing three depreciation methods

Dexter Industries purchased packaging equipment on January 8 for $108,000. The equipment was expected to have a useful life of three years, or 21,600 operating hours, and a residual value of $5,400. The equipment was used for 8,640 hours during Year 1, 6,480 hours in Year 2, and 6,480 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.

Answer 1

Solution

	Depreciation expense
Year	SLM	Units of activity	DDB
1	$          34,200	$            41,040	$           72,000
2	$          34,200	$            30,780	$           24,000
3	$          34,200	$            30,780	$             6,600
TOTAL	$        102,600	$         102,600	$         102,600

Working

Straight line Method
A	Cost	$ 108,000
B	Residual Value	$ 5,400
C=A - B	Depreciable base	$ 102,600
D	Life [in years left ]	3
E=C/D	Annual SLM depreciation	$ 34,200

.

Units of Production method
A	Cost	$ 108,000
B	Residual Value	$ 5,400
C=A - B	Depreciable base	$ 102,600
D	Usage in units(in Hours)	21,600
E	Depreciation per hour	$ 4.75

.

Depreciation schedule-Units of Activity
Year	Book Value	Usage	Depreciation expense	Accumulated Depreciation	Ending Book Value
1	$              108,000	8640	$                   41,040	$                    41,040	$               66,960
2	$                66,960	6480	$                   30,780	$                    71,820	$               36,180
3	$                36,180	6480	$                   30,780	$                  102,600	$                  5,400

.

Double declining Method
A	Cost	$ 108,000
B	Residual Value	$ 5,400
C=A - B	Depreciable base	$ 102,600
D	Life [in years]	3
E=C/D	Annual SLM depreciation	$ 34,200
F=E/C	SLM Rate	33.33%
G=F x 2	DDB Rate	66.67%

.

Depreciation schedule-Double declining
Year	Beginning Book Value	Depreciation rate	Depreciation expense	Accumulated Depreciation	Ending Book Value
1	$ 108,000	66.67%	$ 72,000	$ 72,000	$ 36,000
2	$ 36,000	66.67%	$ 24,000	$ 96,000	$ 12,000
3	$ 12,000	66.67%	$ 6,600	$ 102,600	$ 5,400