Question

9-20 Computing depreciation-three methods Crispy Fried Chicken bought equipment on January 2, 2018, for $33,000. The equip- ment was expected to remain in service for four years and to operate for 6,750 hos. At the end of the equipment's useful life, Crispy's estimates that its residual value will be $6,000. The equipment operated for 675 hours the first year, 2,025 hours the sec- ond year, 2,700 hours the third year, and 1,350 hours the fourth year. Requirements 1. Prepare a schedule of depreciation epense, accumulated depreciation, and book value per year for the equipment under the three depreciation methods: straight-line, units- of-production, and double-declining-balance. Show your computations. Note Three depreciation schedules must be prepared. 2. Which method tracks the wear and tear on the equipment most closely?

Answer 1

Method 1: Straight -line depreciation

Under straight line method of depreciation, the depreciation expense will be same for all the years.

Formula for straight line = (Purchase price of asset - Salvage value) / Estimated useful life of the asset

= ($33,000 - $6,000) / 4 years = $6,750 every year

Date	Book value at beginning of the year	Depreciation expense	Accumulated depreciation	Carrying value of asset
31.12.2018	33,000	6,750	6,750	26,250
31.12.2019	26,250	6,750	13,500	19,500
31.12.2020	19,500	6,750	20,250	12,750
31.12.2021	12,750	6,750	27,000	6,000

Method 2: Units of production depreciation method

Under units of production depreciation method, depreciation is charged based on the number of units produced by the asset.

Total number of hours the equipment is operated = 6,750 hours

Depreciable amount = Purchase price - Residual value of the equipment

= $33,000 - $6,000 = $27,000

Particulars	Year 1	Year 2	Year 3	Year 4
a. Depreciable amount ($)	27,000	27,000	27,000	27,000
b. Total productive hours	6,750	6,750	6,750	6,750
c. Hours operated in a year	675	2,025	2,700	1,350
d. Depreciation ($) [(a/b)*c]	2,700	8,100	10,800	5,400
e. Accumulated depreciation ($)	2,700	10,800	21,600	27,000
f. Book value at the end($) ($33,000-e)	30,300	22,200	11,400	6,000

Method 3: Double-declining balance method

Under double-declining balance method, deprecation is charge will be twice the depreciation rate.

Depreciation rate = (1/useful life) * 100 = (1/4) *100 = 25%

Double-declining balance depreciation rate = 2 * 25% = 50%

Therefore, depreciation is charged at 50% of the carrying value for every year upto the value of does not fall below residual value

Year 1:

Depreciation Charge = $33,000 *50% = $16,500

Accumulated depreciation = $16,500

Carrying value of the equipment = $33,000 - $16,500 = $16,500

Year 2:

Depreciation Charge = ($33,000 - $16,500) *50% = $8,250

Accumulated depreciation = $16,500 + $8,250 = $24,750

Carrying value of the equipment = $33,000 - $24,750 = $8,250

Year 3:

Depreciation Charge = ($33,000 - $16,500 - $8,250) *50% = $4,125. If we charge $4,125 the estimated residual charge will fall below the $6,000. So to remain the residual value at $6,000 the depreciation charge for the year 3 will be restricted to $2,250

Accumulated depreciation = $16,500 + $8,250 +$2,250 = $27,000

Carrying value of the equipment = $33,000 - $27,000 = $6,000

2. Conclusion on which method tracks the wear and tear: Using the method units of production method will be more appropriate for the wear and tear of the equipment is most close and relevant. Since it will have the charge based on the units produced.