Question

Comparing Three Depreciation Methods

Waylander Coatings Company purchased waterproofing equipment on January 6 for $272,000. The equipment was expected to have a useful life of four years, or 6,400 operating hours, and a residual value of $22,400. The equipment was used for 2,400 hours during Year 1, 2,000 hours in Year 2, 1,200 hours in Year 3, and 800 hours in Year 4.

Required:

1. Determine the amount of depreciation expense for the years ended December 31, Year 1, Year 2, Year 3, and Year 4, 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 four years by each method.

Note: FOR DECLINING BALANCE ONLY, round the multiplier to four decimal places. Then 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		$			$			$
Year 4		$			$			$
Total		$			$			$

2. What method yields the highest depreciation expense for Year 1?

3. What method yields the most depreciation over the four-year life of the equipment?

Answer 1

Solution

1) Depreciation Expense per year and total depreciation:

Year	Straight-Line Method	Units-of-Activity Method	Double-Declining-Balance Method
1	$ 62,400	$ 93,600	$                 136,000
2	$ 62,400	$ 78,000	$ 68,000
3	$ 62,400	$ 46,800	$ 34,000
4	$ 62,400	$ 31,200	$ 11,600
Totals	$           249,600	$           249,600	$ 249,600

Notes:

A) Straight-Line Method Depreciation = ( Cost - Salvage Value) / Number of years

= ( $ 272,000 - $ 22,400) / 4 years = $62,400.

B) Units-of-Activity Method

Cost	Residual value	Total Operating hours	Rate per hour
$272,000	$ 22,400	6400	39 ($272,000-$22,400) / 6,400 hrs

Year	Rate	Units	Yearly depreciation
1	39	2,400	93,600 (2,400*39)
2	39	2,000	78,000 (2000*39)
3	39	1,200	46,800 (1200*39)
4	39	800	31,200 (800*39)
Totals		6,400

C) Double-Declining-Balance Method:

Year	Opening Balance	Rate	Depreciation	Closing Balance
1	$ 272,000	50%	$                 136,000	$        136,000
2	$           136,000	50%	$ 68,000	$ 68,000
3	$ 68,000	50%	$ 34,000	$ 34,000
4	$ 34,000	50%	$ 11,600	$ 22,400

Year 4 Depreciation will be $ 11,600 to keep residual value at $ 22,400

Under double declining method, depreciation is calculation as follows:

Number of years useful life	4
Depreciation rate of assets (1/number of years)	25%
DDB Depreciation rate	50% (25% x 2)

2) DDB Method  yields the highest depreciation expense for Year 1

3) All methods yields the most depreciation over the four-year life of the equipment

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