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Comparing Three Depreciation Methods Dexter Industries purchased packaging equipment on January 8 for $776,600. The equipment...

Comparing Three Depreciation Methods

Dexter Industries purchased packaging equipment on January 8 for $776,600. The equipment was expected to have a useful life of three years, or 7,500 operating hours, and a residual value of $64,100. The equipment was used for 3,000 hours during Year 1, 2,325 hours in Year 2, and 2,175 hours in Year 3.

Required:

1. Determine the amount of depreciation expense for the three years ending December 31, Year 1, Year 2, Year 3, 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 all methods, round the answer 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?

Solutions

Expert Solution

1
Straight line depreciation for each year remains same
Straight line depreciation (Cost - Residual value)/Estimated useful life
Straight line depreciation (776600-64100)/3
Straight line depreciation $237,500
Calculation of depreciation under units of activity method
Depreciation per hour Cost - Residual value/Operating hours
Depreciation per hour (776600-64100)/7500
Depreciation per hour $95.00
Year 1 $285,000 95*3000
Year 2 $220,875 95*2325
Year 3 $206,625 95*2175
Double declining balance method
Double declining depreciation rate 2*(1/3)
Double declining depreciation rate 66.67%
Cost of equipment $776,600.00
Depreciation year 1 $517,733.33 776600*66.67%
Book value at end of year 1 $258,866.67
Depreciation year 2 $172,577.78 258866.67*66.67%
Book value at end of year 2 $86,288.89
Depreciation year 3 $22,188.89 (86288.88-64100)
Book value at end of year 3 $64,100.00 (Restricted to residual value)
Depreciation Expense
Year Straight-Line Method Units-of-Activity Method Double-Declining-Balance Method
Year 1 $237,500 $285,000 $517,733
Year 2 $237,500 $220,875 $172,578
Year 3 $237,500 $206,625 $22,189
Total $712,500 $712,500 $712,500
2
Double-declining depreciation method provides for highest depreciation in year 1
3
The total depreciation over the life of equipment is same under all the three methods

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