Question

F Corporation purchased equipment for $450,000. Residual value at the end of the estimated 6 years or 150,000 hours service life is expected to be $60,000.

Using Straight-line depreciation, determine:

1. Book value at the end of year 3      $_____

Using  180% declining balance depreciation, determine:

2. Depreciation expense for year 2     $_____
3. Depreciation expense for year 3     $_____

Year	Hours used
1	25,000
2	24,900
3	25,100
4	25,400
5	25,100
6	24,500

Using Activity based depreciation, determine:

4. Depreciation expense for year 3    $____
5. Book value at the end of year 3      $____

Answer 1

Answer-Book value at the end of year 3 = $255000.

Explanation- Straight line Method-

= Cost of asset- Salvage value of asset/No. of useful life (years)

=($450000-$60000)/6 years

=$390000/6 years

= $65000

First Year depreciation expense = $65000

First year end book value = $450000-$65000 =$385000

Second Year depreciation expense = $65000

Second year end book value = $385000-$65000 =$320000

Third Year depreciation expense = $65000

Third year end book value = $320000-$65000 =$255000

Answer:- Depreciation expense for year 2 = $94500.

Depreciation expense for year 3 = $66150.

Explanation-

Double Declining balance depreciation is calculated using the following formula:

Depreciation = Depreciation Rate * Book Value of Asset

Depreciation rate is given by the following formula:

Depreciation Rate = Accelerator *Straight Line Rate

Straight-line Depreciation Rate = 1/6 = 0.1667 = 16.67%
180% Declining Balance Rate = 16.67%*180% = 30%

Depreciation for Year 1 = $450000 *30% = $135000

Book value at end of Year 1 = $450000 – $135000 = $315000

Depreciation for Year 2 = $315000* 30% = $94500

Book value at end of Year 2 = $315000 – $94500 = $220500

Depreciation for Year 3 = $220500* 30% = $66150

Book value at end of Year 3 = $220500 – $66150 = $154350

Answer- The depreciation expense for year 3 = $65260.

. Book value at end of Year 3 = $255000.

Explanation- Activity based depreciation method:-Annual depreciation expense per unit-

=Cost – salvage /Total units

=($450000-$60000)/150000 hours

=$2.6 per hour

Depreciation expense in year 1= Depreciation expense per hour* Hours used

                                              =$2.6 per hour*25000 hours

                                                 =$65000

Depreciation expense in year 2= Depreciation expense per hour* Hours used

                                                =$2.6 per hour *24900 hours

                                                 =$64740

Depreciation expense in year 3= Depreciation expense per hour* Hours used

                                                =$2.6 per hour *25100 hours

                                                 =$65260

Book value at end of Year 3 = $450000 – $65000 - $64740-$65260

= $255000