Question

Diamond Autobody purchased some new equipment. The new equipment cost $90,000. The company estimates the equipment will have a residual value of $10,000. Diamond also estimates it will use the equipment for eight years or about 5,000 total hours. Required: Prepare a depreciation schedule for eight years using the following methods: 1. Straight-line. 2. Double-declining-balance. 3. Activity-based. Actual use per year was as follows: Year Hours Used 1 850 2 750 3 800 4 730 5 700 6 625 7 400 8 425

Answer 1

Diamond Autobody

Depreciation schedule of the equipment for 8 years under the various methods:

1.Straight line depreciation method –

Depreciation expense = depreciable base x 1/useful life

Depreciable base = cost – residual value

Cost = $90,000

residual value = $10,000

Useful life = 8 years

Depreciable base = 90,000 – 10,000 = $80,000

Depreciation expense= 80,000 x 1/8 = $10,000

Under the straight line method, the annual depreciation expense would remain same throughout the useful life of the asset. Hence, annual depreciation expense for each of 8 years is $10,000.

Straight line method:
Year	Depreciable Cost	Depreciation Expense	Accumulated Depreciation	Carrying Amount
1	$90,000	$10,000	$10,000	$80,000
2	$90,000	$10,000	$20,000	$70,000
3	$90,000	$10,000	$30,000	$60,000
4	$90,000	$10,000	$40,000	$50,000
5	$90,000	$10,000	$50,000	$40,000
6	$90,000	$10,000	$60,000	$30,000
7	$90,000	$10,000	$70,000	$20,000
8	$90,000	$10,000	$80,000	$10,000

Double-declining balance method:

Depreciation expense = depreciation rate x cost/book value

Depreciation rate = 2 x 1/useful life

Book value = cost – accumulated depreciation

Useful life = 8 years

Depreciation rate = 2 x 1/8 = 25%

Depreciation expense for year 1 = 90,000 x 25% = $22,500

Depreciation expense for year 2 = (90,000 – 22,500) x 25% = $16,875

Depreciation expense for year 3 = (90,000 – 39,375) x 25% = $12,656

Depreciation expense for year 4 = (90,000 – 52,031) x 25% = $9,492

Depreciation expense for year 5 = (90,000 – 61,523) x 25% = $7,119

Depreciation expense for year 6 = (90,000 – 68,642) x 25% = $5,339

Depreciation expense for year 7 = (90,000 – 73,981) x 25% = 4,005

Depreciation expense for year 8 = (90,000 – 77,986) x 25% = $3,009

Double-Declining Balance method:
Year	Opening Carrying Amount	Depreciation Expense	Accumulated Depreciation	Carrying Amount
1	$90,000	$22,500	$22,500	$67,500
2	$67,500	$16,875	$39,375	$50,625
3	$50,625	$12,656	$52,031	$37,969
4	$37,969	$9,492	$61,523	$28,477
5	$28,477	$7,119	$68,642	$21,358
6	$21,358	$5,339	$73,981	$16,019
7	$16,019	$4,005	$77,986	$12,014
8	$12,014	$2,014	$80,000	$10,000

Note: Since carrying amount cannot be less than the residual value ($10,000) the depreciation for year 8 would be adjusted to the point where book value equals the residual value. Hence, depreciation expense for year 8 = $12,014 – $10,000 = $2,014

Activity-Based depreciation method –

Depreciation expense =annual usage x activity rate

Activity rate = depreciable base/total estimated activity

Depreciable base = Cost- residual value

cost = $90,000

residual value = $10,000

depreciable base = 90,000 – 10,000 = $80,000

total estimated activity = 5,000 hours

activity rate = 80,000/5,000 hours = $16 per hour

Year	Hours of activity	activity rate	Depreciation Expense	Accumulated Depreciation	Carrying Amount
1	850	$16	$13,600	$13,600	$76,400
2	750	$16	$12,000	$25,600	$64,400
3	800	$16	$12,800	$38,400	$51,600
4	730	$16	$11,680	$50,080	$39,920
5	700	$16	$11,200	$61,280	$28,720
6	625	$16	$10,000	$71,280	$18,720
7	400	$16	$6,400	$77,680	$12,320
8	425	$16	$2,320	$80,000	$10,000

Note: Since carrying amount cannot be less than the residual value ($10,000) the depreciation for year 8 would be adjusted to the point where book value equals the residual value. Hence, depreciation expense for year 8 = 12,320 - $10,000 = $2,320