Question

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?

Answer 1

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