Waylander Coatings Company purchased waterproofing equipment on January 6 for $320,000. The equipment was expected to have a useful life of four years, or 20,000 operating hours, and a residual value of $35,000. The equipment was used for 7,200 hours during Year 1, 6,400 hours in Year 2, 4,400 hours in Year 3, and 2,000 hours in Year 4.
Instructions
1. Determine the amount of depreciation expense for the years ended December 31, Year 1, Year 2, Year 3, and Year 4, 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 four 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 four-year life of the equipment?
Answer:
1.
a. Straight- b. Units-of- c. Double-
Line Activity Declining-Balance
Year Method Method Method
Year 1 $ 71,250 $102,600 $160,000
Year 2 71,250 91,200 80,000
Year 3 71,250 62,700 40,000
Year 4 71,250 28,500 5,000
Total $285,000 $285,000 $285,000
Calculations:
Straight-line method:
($320,000 – $35,000) ÷ 4 = $71,250 each year
Units-of-activity method:
($320,000 – $35,000) ÷ 20,000 hours = $14.25 per hour
Year 1: 7,200 hours × $14.25 = $102,600
Year 2: 6,400 hours × $14.25 = $91,200
Year 3: 4,400 hours × $14.25 = $62,700
Year 4: 2,000 hours × $14.25 = $28,500
Double-declining-balance method:
Year 1: $320,000 × [(1 ÷ 4) × 2] = $160,000
Year 2: ($320,000 – $160,000) × [(1 ÷ 4) × 2] = $80,000
Year 3: ($320,000 – $160,000 – $80,000) × [(1 ÷ 4) × 2] = $40,000
Year 4: ($320,000 – $160,000 – $80,000 – $40,000 – $35,000) = $5,000
Note: Book value should not be reduced below the residual value of $35,000.
2. The double-declining-balance method yields the most depreciation expense in
Year 1 of $160,000.
3. Over the four-year life of the equipment, all three depreciation methods yield
the same total depreciation, $285,000, which is the cost of the equipment of
$320,000 less the residual value of $35,000.