Question

Comparing three depreciation methods Dexter Industries purchased packaging equipment on January 8 for $86,400. The equipment was expected to have a useful life of three years, or 21,600 operating hours, and a residual value of $5,400. The equipment was used for 8,640 hours during Year 1, 6,480 hours in Year 2, and 6,480 hours in Year 3. Required: 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. Round the final answers for each year to the nearest whole dollar. Depreciation Expense Year Straight-Line Method Units-of-Activity Method Double-Declining-Balance Method Year 1 Year 2 Year 3 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

Solution 1)	Calculation of Depreciation:
	Depreciation Expense
	Straight Line Method	Units of Activity Method	Double Decling Balance Method
Year 1	27000	32400	57600
Year 2	27000	24300	19200
Year 3	27000	24300	4200
Total	81000	81000	81000
Working Notes:	Depreciation as per Straight Line Method
	Purchase Value	86400
	Residual Value	5400
	Life	3 Years
	SLM Depreciation	27000
		(86400-5400)/3
	Depreciation as per units of activity Method
	Year	Hours	Depreciation
	Year 1	8640	32400
	Year 1	6480	24300
	Year 1	6480	24300
	Total	21600	81000
	Depreciable Value(86400-5400)	81000
	Depreciation Per hour	3.75
Declining Balance using double the Straight Line rate
	Year 1	Year 2	Year 2
Book Value Opening	86400	28800	9600
Rate	66.67%	66.67%	66.67%
Dep. Exp.	57600	19200	4200
Book Value Closing	28800	9600	5400
	Double declining Dep Rate	=SLM Rate * 2
	SLM Rate	=100%/3 years
	SLM Rate	33.33%
	Double declining Dep Rate	66.67%
Solution 2)	Double declining method yields the highest depreciation in Year 1.
Solution 3)	All the methods, yields the equal depreciation over the 3 Years.