Question

On January 2, 2014, Able Company acquired new equipment at a cost of $290,000. The machine has an estimated useful life of 5 years, or 25,000 operating hours, after which it will have an estimated residual value of $15,000. Compute the depreciation charges for the first two years (2014 and 2015), using the following methods. (Show all computations).

a. Straight-line

b. Units-of-production (Equipment was used 8,000 hours during 2014 and 7,000 hours during 2015.)

c. Double-declining balance

Answer 1

a.

Cost of equipment = $290,000

Residual value = $15,000

Useful life = 5 year

Annual depreciation expense = (Cost of equipment - Residual value)/Useful life

= (290,000 - 15,000)/5

= 275,000/5

= $55,000

Depreciation expense for 2014 = $55,000

Depreciation expense for 2015 = $55,000

b.

Depreciation expense per hour = (Cost of equipment - Residual value)/Useful life in hour

= (290,000 - 15,000)/25,000

= 275,000/25,000

= $11

Depreciation expense for 2014 = Operating hour used x Depreciation expense per hour

= 8,000 x 11

= $88,000

Depreciation expense for 2015 = Operating hour used x Depreciation expense per hour

= 7,000 x 11

= $77,000

c.

Double declining depreciation rate = 2 x 1/Useful life

= 2 x 1/5

= 40%

Depreciation expense for 2014 = Cost of equipment x Double declining depreciation rate

= 290,000 x 40%

= $116,000

Book value of equipment at Jan 1, 2015 = Cost of equipment - Depreciation expense for 2014

= 290,000 - 116,000

= $174,000

Depreciation expense for 2014 = Book value of equipment at Jan 1, 2015 x Double declining depreciation rate

= 174,000 x 40%

= $69,600

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