Question

Dexter Industries purchased packaging equipment on January 8 for $72,000. The equip ment 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 Straight- Line Method Units-ofDouble-Declining- Activity Method Balance Method Year 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

	Daxter Industries
a)	Straight Line Method
	Cost of Assets	$       72,000.00
	Salvage Value	$          4,500.00
	Estimated Useful life	3	Years
	Depreciation Amount=(Cost-Scrap Value)/Useful life=($72000-$4500)/3	$       22,500.00
Year	Cost	Depreciation	Accumulated Depreciation	Book Value
1	$                                                                         72,000.00	$       22,500.00	$              22,500.00	$           49,500.00
2		$       22,500.00	$              45,000.00	$           27,000.00
3		$       22,500.00	$              67,500.00	$             4,500.00
	Total	$       67,500.00
b)	Double Declining Balance Method
	Cost of Assets	$       72,000.00
	Salvage Value	$          4,500.00
	Estimated Useful life	3	Years
	Depreciation Rate=	(1/useful life)*200%
	Depreciation Rate=	0.333333333
	Double Declining Rate	0.666666667
	Double Declining Rate	66.67%
Year	Cost	Depreciation Rate	Depreciation	Accumulated Depreciation	Book Value
1	$                                                                         72,000.00	66.67%	$              48,000.00	$           48,000.00	$                               24,000.00
2		66.67%	$              16,000.00	$           64,000.00	$                                 8,000.00
3		66.67%	$                 3,500.00	$           67,500.00	$                                 4,500.00
		Total	$              67,500.00
Year 1	$72000*66.67%
Year 2	($72000-$48000)*66.67%
Year 3	($8000-$4500)=$3500
	Depreciation cannot be more than the residual value in the third year.
(c )	Unit of Activity Method
	Working Hours	18000	Working Hours
	Hours used in year 1	7600	Hours
Year 1	Depreciation
	($72000-$4500)*7600/18000	$       28,500.00
Year 2	($72000-$4500)*6000/18000	$       22,500.00
Year 3	($72000-$4500)*4400/18000	$       16,500.00
	Total Depreciation	$       67,500.00
2)	Under double declining method highest Depreciation in year 1
3)	All the three method yield the most depreciation over the three year life of the Equipment.