Question

Comparing three depreciation methods Dexter Industries purchased packaging equipment on January 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 Requiredi 1. Determine the amount of depreciation expense for the three years ending December 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. Round the final answers for each year to the nearest whole dollar Depreciation Expense Straight-Line Units-of-Activity Double-Declining-Balance Year Method Method Method Year Year 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

Answer 1

1.

Depreciation Expense
Year	Straight-Line Method	Units-of-Activity Method	Double-Declining-Balance Method
Year 1	22500	28500	47995
Year 2	22500	22500	16002
Year 3	22500	16500	3503
Total $	67500	67500	67500

Working:

Depreciable cost = Purchase price - Residual value = $72000 - $4500 = $67500

Annual depreciation expense under straight-line method = Depreciable cost/Estimated useful life = $67500/3 = $22500

Depreciation per unit of activity = Depreciable cost/Total operating hour = $67500/18000 = $3.75 per operating hour

Annual depreciation expense under units-of-activity method= Depreciation rate x Annual operating hours

Year	Annual Operating Hours	Depreciation Rate	Annual Depreciation
Year 1	7600	3.75	28500
Year 2	6000	3.75	22500
Year 3	4400	3.75	16500

Straight-line depreciation rate = 100%/3 years = 33.33%

Double-declining depreciation rate = 2 x 33.33% = 66.66%

Year	Book Value Beginning of Year	x	Depreciation Rate	=	Annual Depreciation	End of Year
						Accumulated Depreciation	Book Value
Year 1	72000		66.66%		47995	47995	24005
Year 2	24005		66.66%		16002	63997	8003
Year 3	8003				3503	67500	4500

2. Double-declining-balance method yields the highest depreciation expense of $47995 for Year 1.

3. All the three methods yield the same amount of depreciation of $67500 over the three-year life of the equipment.