Question

University Car Wash built a deluxe car wash across the street from campus. The new machines cost $234,000 including installation. The company estimates that the equipment will have a residual value of $27,000. University Car Wash also estimates it will use the machine for six years or about 12,000 total hours. Actual use per year was as follows:

Year	Hours Used
1	2,800
2	1,900
3	2,000
4	2,000
5	1,800
6	1,500

1. Prepare a depreciation schedule for six years using the straight-line method. (Do not round your intermediate calculations.)

2. Prepare a depreciation schedule for six years using the double-declining-balance method. (Do not round your intermediate calculations.)

3. Prepare a depreciation schedule for six years using the activity-based method. (Round your "Depreciation Rate" to 2 decimal places and use this amount in all subsequent calculations.)

Answer 1

Ans. 1	Straight line depreciation = (Cost of asset - Residual value) / Useful life in years
	($234,000 - $27,000) / 6
	$207,000 / 6
	$34,500
	Year	Depreciation
	1	$34,500
	2	$34,500
	3	$34,500
	4	$34,500
	5	$34,500
	6	$34,500
	Accumulated depreciation	$207,000
	*In Straight line method the depreciation is equal in each year.
Ans. 2	Double declining balance method:
	Double declining balance depreciation rate = 2 * 1 / life of assets
		2 * 1 / 6
		2/6
	*Depreciation = Remaining value at the beginning of the year * Double declining balance depreciation rate
	Year	Value at the beginning (a)	Depreciation (b = a*0.33)	Net book value (a - b)
	1	$234,000	$78,000	$156,000
	2	$156,000	$52,000	$104,000
	3	$104,000	$34,667	$69,333
	4	$69,333	$23,111	$46,222
	5	$46,222	$15,407	$30,815
	6	$30,815	$3,815	$27,000
	Accumulated depreciation		$207,000
	*In double declining balance method the book value at the end of year is the residual value of the assets, so the depreciation
	would be calculated by the following way:
	Depreciation for Year 6 =   Value at the beginning - Residual value
	$30,815 - $27,000
	$3,815
Ans. 3	Activity based depreciation method:
	Depreciation per unit =   (Cost of asset - Residual value) / Expected activity
		($234,000 - $27,000) / 12,000
		$207,000 / 12,000
		$17.25	per unit
	Year	Depreciation per unit (a)	Actual activity (b)	Depreciation (a*b)
	1	$17.25	2800	$48,300
	2	$17.25	1900	$32,775
	3	$17.25	2000	$34,500
	4	$17.25	2000	$34,500
	5	$17.25	1800	$31,050
	6	$17.25	1500	$25,875
	Accumulated depreciation			$207,000