Comparing Three Depreciation Methods

Dexter Industries purchased packaging equipment on January 8 for $490,800. The equipment was expected to have a useful life of three years, or 5,700 operating hours, and a residual value of $40,500. The equipment was used for 2,280 hours during Year 1, 1,767 hours in Year 2, and 1,653 hours in Year 3.

Required:

1. Determine the amount of depreciation expense for the three years ending December 31, Year 1, Year 2, Year 3, 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 all methods, 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?

Assume the following year 2 income statement for Johnstone Corporation, which was a C corporation in year 1 and elected to be taxed as an S corporation beginning in year 2. Johnstone’s earnings and profits at the end of year 1 were $10,780. Marcus is Johnstone’s sole shareholder, and he has a stock basis of $43,000 at the end of year 1. Johnstone Corporation Income Statement December 31, Year 2 Year 2 (S Corporation) Sales revenue $ 162,000 Cost of goods sold (38,000 ) Salary to owners (63,000 ) Employee wages (53,500 ) Depreciation expense (7,000 ) Miscellaneous expenses (4,300 ) Interest income 11,520 Overall net income $ 7,720 What is Johnstone's accumulated adjustments account at the end of year 2, and what amount of dividend income does Marcus recognize on the year 2 distribution in each of the following alternative scenarios? (Leave no answer blank. Enter zero if applicable.)

a) Johnstone distributed $6,600 to Marcus in year 2.

b) Johnstone distributed $10,600 to Marcus in year 2.

c) Johnstone distributed $16,600 to Marcus in year 2.

d) Johnstone distributed $26,600 to Marcus in year 2.

Comparing Three Depreciation Methods

Dexter Industries purchased packaging equipment on January 8 for $306,000. The equipment was expected to have a useful life of three years, or 7,800 operating hours, and a residual value of $25,200. The equipment was used for 3,120 hours during Year 1, 2,418 hours in Year 2, and 2,262 hours in Year 3.

Required:

1. Determine the amount of depreciation expense for the three years ending December 31, Year 1, Year 2, Year 3, 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 all methods, 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?

Cost of owning and cost of leasing tables are reproduced below.

Using the appropriate table from the Chapter 12 Appendix, record the present value factor at 10% for each year and compute the present value cost of owning and the present value of leasing. Which alternative is more desirable at this interest rate? Do you think your answer would change if the interest rate were six percent instead of ten percent?

Cost of Owning- Anywhere Clinic - Comparative Present Value

Cost of Leasing- Anywhere Clinic - Comparative Present Value

Variable costs per unit: Manufacturing: Direct materials $ 27 Direct labor $ 13 Variable manufacturing overhead $ 2 Variable selling and administrative $ 1 Fixed costs per year: Fixed manufacturing overhead $ 320,000 Fixed selling and administrative expenses $ 90,000 During its first year of operations, Walsh produced 50,000 units and sold 40,000 units. During its second year of operations, it produced 40,000 units and sold 50,000 units. The selling price of the company’s product is $58 per unit.

1. Lessee enters into a five-year lease of office space on January 1, and concludes that the agreement is an operating lease. Lessee pays initial direct costs of $5,000. The agreement provides the following:

Complete the following table to show the impact on each year of Lessee’s income statement and balance sheet. Prepare the journal entries for the Lessee at the commencement of the lease and at the end of year 1.

Comparing Three Depreciation Methods

Dexter Industries purchased packaging equipment on January 8 for $776,600. The equipment was expected to have a useful life of three years, or 7,500 operating hours, and a residual value of $64,100. The equipment was used for 3,000 hours during Year 1, 2,325 hours in Year 2, and 2,175 hours in Year 3.

Required:

1. Determine the amount of depreciation expense for the three years ending December 31, Year 1, Year 2, Year 3, 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 all methods, 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 the following short questions. Show all your calculations and explain every step. There are several ways of solving the questions. I expect each of you to solve them in your own way.

1. What is the length of time required for an amount of money to quadruple in value at an interest rate of 8% per year?
2. What is the equal annual amount deposit needed in years 1 through 5 (i.e., in years 1, 2, 3, 4, and 5) to provide for a withdrawal of 1100 TL in year 6 and subsequent withdrawals that increase in 400 TL per year from year 7 to year 35 at an interest rate of 8% per year?
3. The maintenance cost for a certain machine is 1500 TL per year for the first 5 years (from n=1 to n=5), 2200 TL in year 6, and from year 7 until year 35 the maintenance cost per year increases 6% with respect to the amount of the previous year. At an interest rate of 8% per year, what is the equivalent equal payment series?

Draw the cash flow diagrams. Always use factor notation.

Comparing Three Depreciation Methods

Dexter Industries purchased packaging equipment on January 8 for $219,800. The equipment was expected to have a useful life of three years, or 6,300 operating hours, and a residual value of $18,200. The equipment was used for 2,520 hours during Year 1, 1,953 hours in Year 2, and 1,827 hours in Year 3.

Required:

1. Determine the amount of depreciation expense for the three years ending December 31, Year 1, Year 2, Year 3, 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 all methods, 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?

1. Comparing Three Depreciation Methods

   Dexter Industries purchased packaging equipment on January 8 for $274,600. The equipment was expected to have a useful life of three years, or 7,200 operating hours, and a residual value of $22,600. The equipment was used for 2,880 hours during Year 1, 2,232 hours in Year 2, and 2,088 hours in Year 3.

   Required:

   1. Determine the amount of depreciation expense for the three years ending December 31, Year 1, Year 2, Year 3, 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 all methods, round the answer for each year to the nearest whole dollar.

   Depreciation Expense
   Year	Straight-Line Method		Units-of-Activity Method		Double-Declining-Balance Method
   Year 1	$		$		$
   Year 2	$		$		$
   Year 3	$		$		$
   Total	$		$		$

   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?
   

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