Question

Dexter Industries purchased packaging equipment on January 8 for $236,000. The equipment was expected to have a useful life of three years, or 5,700 operating hours, and a residual value of $19,400. The equipment was used for 2,280 hours during Year 1, 1,767 hours in Year 2, and 1,653 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

Answer 1:

Year	SLM	Units of activity	DDB
1	$   72,200	$            86,640	$ 157,333
2	$   72,200	$            67,146	$   52,444
3	$   72,200	$            62,814	$   17,481
Total	$ 216,600	$          216,600	$ 227,259

Calculations:

Straight Line Method:

Depreciation (as per SLM) = (Cost - salvage value) / Number of years

A	Cost	$ 236,000
B	Residual / Salvage Value	$   19,400
C	Number of years	3
(A-B)/C	Depreciation (SLM)	$   72,200

and,

Year	Value at the beginning	Depreciation every year	Accumulated depreciation	Value at the end
1	$                      236,000	$                           72,200	$                                72,200	$            163,800
2	$                      163,800	$                           72,200	$                              144,400	$              91,600
3	$                         91,600	$                           72,200	$                              216,600	$              19,400
Total		$                         216,600

Double declining Balance (DDB) Method:

Depreciation Rate (as per double declining method) = 100 / Years * 2

A	Cost	$ 236,000
C	Number of years	3
(100/C*2) =D	Depreciation Rate (Double declining method)	67%

and,

Year	Value at the beginning	Depreciation every year	Accumulated depreciation	Value at the end
1	$                      236,000	$                         157,333	$                              157,333	$              78,667
2	$                         78,667	$                           52,444	$                              209,778	$              26,222
3	$                         26,222	$                           17,481	$                              227,259	$                8,741
Total		$                         227,259

Units of activity Method:

Depreciation rate (as per Units of production method) = (Cost - salvage value) / Total expected units

A	Cost	$ 236,000
B	Residual / Salvage Value	$   19,400
C	Expected Numer of units	5,700
(A-B)/C	Depreciation Rate	$          38

and,

Hours	Year	Value at the beginning	Depreciation every year	Accumulated depreciation	Value at the end
2,280	1	$                      236,000	$                           86,640	$                                86,640	$            149,360
1,767	2	$                      149,360	$                           67,146	$                              153,786	$              82,214
1,653	3	$                         82,214	$                           62,814	$                              216,600	$              19,400
	Total		$                         216,600

Answer 2:

Double declining Balance (DDB) method has highest depreciation in year 1 as it has depreciation of $ 157,333, where other methods have depreciation of $ 72,200 and $ 86,640.

Answer 3:

Double declining Balance (DDB) method has highest depreciation over life of asset as it has depreciation of $ 227,259, where other methods have depreciation of $ 216,600 each.

In case of any doubt or clarification, feel free to come back via comments.