Question

The Flynn Corporation began operations on September 1, 20x3. On that date, equipment
costing $84,000 was purchased. Flynn estimated that the equipment’s useful life would
be seven years and have a residual value of $24,500. Flynn also estimated that the
equipment could be used for about 10,000 hours. It was used for 800 hours in 20x3 and
1,700 hours in 20x4.
Required –
Calculate depreciation expense for 20x3 and 20x4 under each of the following methods:
a) Straight-line method.
b) Units of production method
c) Diminishing balance method at a rate of 30%. Calculate depreciation expense in
20x7 also.

Answer 1

a. Under the straight line method, depreciation is calculated by the following formula:

Depreciation = Cost - Residual value / Useful life

Cost = $84000, Residual value = $24500, useful life = 7

Depreciation = ($84000 - $24500) / 7 = $8500

Under straight line method, depreciation remains the same for every year.

Depreciation in 20X3 will be for 4 months (i.e. Sep 1, 20X 3 to Dec 31, 20X3). So depreciation for 20 X 3 is:

Depreciation expense = $8500 * 4 / 12 = $2833.33

Depreciation expense in 20 X 4 will be for full year. it will be $8500.

b. Under units of production method, first we will calculate the rate per hour and then we will calculate the depreciation expense.

Rate per hour = Cost - Salvage value / Estimated hours

Estimated hours = 10000

Rate per unit = ($84000 - $24500) / 10000 = $165000 / 300000 = $5.95 per hour

In the next step, we will compute the depreciation expense as per below:

Depreciation expense = Rate per hour * No. of hours used

Depreciation for 20X3 :

No. of hours used in 20X3 was 800, so

Depreciation for 20X3= $5.95 * 800 = $4760

Depreciation for 20X4

No. of hours used in 20X4 was 1700, so

Depreciation for 20X4 = $5.95 * 1700 = $10115

c. Under double declining balance method, depreciation is calculated by the following formula:

Depreciation = 2 * 1 / N * (Cost - Accumulated depreciation)

where, n is the no. of years or useful life and accumulated depreciation is depreciation charged till date

For first year i.e. 20X3, accumulated depreciation will be zero.

Depreciation in 20X3 will be for 4 months (i.e. Sep 1, 20X 3 to Dec 31, 20X3). So depreciation for 20 X 3 is:

Depreciation for 20X3 = 2 * 1 / 7 * ($84000 - 0) * 4 / 12

Depreciation = 2 * 1 / 7 * $84000 * 4 / 12 = $8000

Now, in 20X4, accumulated depreciation will be $8000 (i.e. depreciation charged till date is depreciation for 20X3)

Depreciation for 20X4 will be:

Depreciation = 2 * 1 / 7 * ($84000 - $8000) = 2 * 1 / 7 * $76000 = $21714.29

For calculating depreciation in 20X7, we will continue the depreciation calculation till 20x7 as per below:

In 20X5, accumulated depreciation will be $8000 + $21714.29 = $29714.29 (i.e. depreciation charged till date is depreciation for 20X3 & 20X4)

Depreciation for 20X5 will be:

Depreciation = 2 * 1 / 7 * ($84000 - $29714.29) = 2 * 1 / 7 * $54285.71 = $15510.20

In 20X6, accumulated depreciation will be $29714.29 + $15510.20 = $45224.49 (i.e. depreciation charged till date is depreciation for 20X3, 20X4, 20X5)

Depreciation for 20X6 will be:

Depreciation = 2 * 1 / 7 * ($84000 - $45224.49) = 2 * 1 / 7 * $38775.51 = $11078.72

In 20X7, accumulated depreciation will be $45224.49 + $11078.72 = $56303.21 (i.e. depreciation charged till date is depreciation for 20X3, 20X4, 20X5, 20X6)

Depreciation for 20X7 will be:

Depreciation = 2 * 1 / 7 * ($84000 - $56303.21) = 2 * 1 / 7 * $27696.79 = $7913.37