Dexter Industries purchased packaging equipment on January 8 for $72,000. The equipment was expected to have a useful life of three years, or 18,000 operating hours, and a residual value of $4,500. The equipment was used for 7,600 hours during Year 1, 6,000 hours in Year 2, and 4,400 hours in Year 3.
Instructions
1. Determine the amount of depreciation expense for the three years ending 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. The following columnar headings are suggested for recording the depreciation expense amounts:
Depreciation Expense Year Straight- Line Method Units-of-Activity Method Double-Declining-Balance Method
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.
a. Straight- b. Units-of- c. Double-
Line Activity Declining-Balance
Year Method Method Method
Year 1 $22,500 $28,500 $48,000
Year 2 22,500 22,500 16,000
Year 3 22,500 16,500 3,500
Total $67,500 $67,500 $67,500
Calculations:
Straight-line method:
($72,000 – $4,500) ÷ 3 = $22,500 each year
Units-of-activity method:
($72,000 – $4,500) ÷ 18,000 hours = $3.75 per hour
Year 1: 7,600 hours × $3.75 = $28,500
Year 2: 6,000 hours × $3.75 = $22,500
Year 3: 4,400 hours × $3.75 = $16,500
Double-declining-balance method:
Year 1: $72,000 × (2 ÷ 3) = $48,000
Year 2: ($72,000 – $48,000) × (2 ÷ 3) = $16,000
Year 3: ($72,000 – $48,000 – $16,000 – $4,500) = $3,500
Note: Book value should not be reduced below the residual value of $4,500.
2. The double-declining-balance method yields the most depreciation expense in
Year 1 of $48,000.
3. Over the three-year life of the equipment, all three depreciation methods yield
the same total depreciation, $67,500, which is the cost of the equipment of
$72,000 less the residual value of $4,500.