Question

Modern Products Company purchased new packaging equipment for $262,000 on January 1, 2016. The equipment is expected to be used for 5 years, or 66,000 operating hours. It has an estimated salvage value of $1,000. The equipment was used for 13,200 hours in 2016, 19,800 hours in 2017, and 16,500 hours in 2018.

Compute annual depreciation expense for the first three years, using the straight-line method, the double-declining balance method, and the units of output method

Answer 1

a)

Depreciation under straight line method

(Purchase cost – Salvage value) / Useful life

($262,000- $1,000) / 5

= $ 52,200

Depreciation under straight line method is same for all years. So, Depreciation for 2016 = 2017 = 2018 = $ 52,200

b)

Depreciation under units of output method

= (Purchase cost – Salvage value) / Useful life in operating hours

= ($262,000- $1,000) / 66,000

= $ 3.9545 per hour

So, Depreciation for 2016 = Number of hours x Hourly rate

= 13,200 x $3.9545

= $52,200

Depreciation for 2017

= 19,800 x $3.9545

= $ 78,300

Depreciation for 2018

= 16,500 x $3.9545

= $ 65,250

c)

Depreciation under double declining balance method is double the rate of straight line method and is applied on the written down book value of the asset at the beginning of the year

Straight line rate = 1 / Useful life

= 1 / 5

= 0.20 or 20%

Double declining rate

= 2 x Straight line rate

= 2 x 20%

= 40%

Depreciation of 2016

= Book value at beginning of the year x Depreciation rate

= $262,000 x 40%

= $104,800

Book value at beginning of 2017 = Book value at beginning of 2016 – Depreciation for 2016

= $262,000 - $104,800

= $157,200

Depreciation for 2017

= $157,200 x 40%

= $62,880

Book value at beginning of 2018

= $157,200 - $62,880

= $94,320

Depreciation for 2018

= $94,320 x 40%

= $37,728