Question

Dexter Industries purchased packaging equipment on January 8 for $86,900. The equipment was expected to have a useful life of three years, or 20,000 operating hours, and a residual value of $6,900. The equipment was used for 8,640 hours during Year 1, 6,710 hours in Year 2, and 4,650 hours in Year 3.

	Required:
1.	Determine the amount of depreciation expense for the three years ended December 31 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 STRAIGHT-LINE ONLY, round the first two years to the nearest whole dollar, then round the third year as necessary. For DECLINING BALANCE ONLY, round the multiplier to five decimal places. Then round the answer for each year to the nearest whole dollar.)
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

Based on the information for Dexter industries, we can summarize as follows:-

Cost of the packaging equipment = $86,900

Useful life = 3 years

Expected operating hours = 20,000

Salvage value = $6,900

Depreciation per operating hour = ($86,900 - $6,900)/20,000 hours = $4 per hour.

Requirement 1:-

a.) Depreciation under Straight line method:-

Depreciation per year = (Cost of the asset - Salvage Value)/Estimated life of the asset

=($86,900 - 6,900)/3

=$80,000/3 years

Year	Depreciable Base	Straight Line Depreciation
1	80,000	26,667
2	80,000	26,667
3	80,000	26,666

Ii.) Units of activity method:-

Year	No.of hours	Depreciation per hour	Depreciation expenses
Year 1	8,640	4	34,560
Year 2	6,710	4	26,840
Year 3	4,650	4	18,600

iii.) Double Declining balance method:-

To find the double declining balance method of depreciation:-

=100/estimated useful life of asset

=100/3 years

=33.333%

Now multiply the above percentage into 2

=33.333% * 2

=66.67%

Based on the above calculation , we can setup the depreciation table as follows:-

Year	Depreciable Base	Depreciation rate	Depreciation Amount	Accumulated Depreciation
1	86,900	66.66667%	57,933	57,933
2	28,967	66.66667%	19,311	77,244
3	9,656	66.66667%	2,756	80,000

Hence, 86,900 Cost - 6,900 salvage = $80,000. The depreciation charged under Double declining balance would be limited to $80,000. Please note that even though the depreciation for the 3rd year per the calculation above is $6,376, the recorded depreciation amount is only $2,754. This is attributed to the fact that under Double declining balance method , the deprecation expense is recorded only upto the salvage value of the asset .

$86,900 Cost - $6,900 salvage value = Depreciation upto $80,000

Requirement 2:-

The Depreciation method that yields the highest depreciation expense for Year 1 is Double declining balance method with depreciation expense of $57,933 during Year 1.

Requirement 3:-

At the end of the 3 years, all the depreciation methods are depreciated upto the salvage value of the packaging equipment. Thus, all the methods record a total depreciation expense of $80,000 at the end of Year 3.