Question

(Calculation of depreciation; three methods)

On January 1, 2016, SugarBear Company acquired equipment costing $150,000, which will be depreciated on the assumption that the equipment will be useful for five years and have a residual value of $12,000. The estimated output from this equipment is as follows: 2016—15,000 units; 2017—24,000 units; 2018—30,000 units; 2019—28,000 units; 2020—18,000 units. The company is now considering possible methods of depreciation for this asset.

Required

a.  Calculate what the depreciation expense would be for each year of the asset's life, if the company chooses:

i.The straight-line method

ii.The units-of-production method

iii.The double-diminishing-balance method

b. Briefly discuss the criteria that a company should consider when selecting a depreciation method.

Answer 1

a) i) The straight-line method

Depreciation under straight line method = (Cost of Equipment - Residual Value)/Useful life

= ($150,000 - $12,000)/5 yrs = $27,600 per year

Therefore depreciation for year 2016 to 2020 will be $27,600.

ii) The units-of-production method

Total estimated output in units = 2016+2017+2018+2019+2020

= 15,000+24,000+30,000+28,000+18,000 = 115,000 units

Depreciation per unit of output = ($150,000 - $12,000)/115,000 units = $1.20 per unit

Calculation of Depreciation expense for each year (Amounts in $)

Year	Estimated Output (A)	Depreciation per unit (B)	Total Depreciation (A*B)
2016	15,000	1.20	18,000
2017	24,000	1.20	28,800
2018	30,000	1.20	36,000
2019	28,000	1.20	33,600
2020	18,000	1.20	21,600

iii) Depreciation rate under double diminishing balance method = (1/useful life)*2*100 = 1/5*2*100 = 40%

Calculation of Depreciation for each year (Amounts in $)

Year	Opening Bal (A)	Depreciation (B = A*40%)	Closing Bal (A - B)
2016	150,000	60,000	90,000
2017	90,000	36,000	54,000
2018	54,000	21,600	32,400
2019	32,400	12,960	19,440
2020	19,440	7,776	11,664

b) If the asset produces measurable units, then the units of production method should be used which allocates depreciation on a per unit basis each period. This method allocates more depreciation expense to periods of heavier use and less expense to periods of lighter use. As the equipment given in this case also produces output in units, the units of production method should be use for calculating depreciation expense.