Question

Comparing three depreciation methods

Dexter Industries purchased packaging equipment on January 8 for $72,000. The equipment was expected to have a useful life of three years, or 18,000 operating hours, and a residual value of $4,500. The equipment was used for 7,600 hours during Year 1, 6,000 hours in Year 2, and 4,400 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

1.
Straight line method = (Original Value - Residual Value) / Useful life

Year	Beg Value	Depreciation Expense	Accumulated Depreciation	End Value
Year 1	$            72,000	$         22,500	$           22,500	$       49,500
Year 2	$            49,500	$         22,500	$           45,000	$       27,000
Year 3	$            27,000	$         22,500	$           67,500	$         4,500

Units of Production Method = (Original Value - Salvage Value) / Total Units of Production

Year	Beg Value	Depreciation Expense	Accumulated Depreciation	End Value
Year 1	$            72,000	$         28,500	$           28,500	$       43,500
Year 2	$            43,500	$         22,500	$           51,000	$       21,000
Year 3	$            21,000	$         16,500	$           67,500	$         4,500

Double Declining Balance method = Beginning Book Value x 2 times straight line rate

Year	Beg Value	Depreciation Expense	Accumulated Depreciation	End Value
Year 1	$            72,000	$         48,000	$           48,000	$       24,000
Year 2	$            24,000	$         16,000	$           64,000	$         8,000
Year 3	$              8,000	$           3,500	$           67,500	$         4,500

2.
Double Declining Balance method yields highest depreciation expense for Year 1

3.
All methods yields equal amount of depreciation over the life of the asset.