Question

Dexter industries purchased packaging equipment on January 8 for $444800. The equipment was expected to have a useful life of three years, or 5,100 operating hours, and a residual value of $36,800. The equipment was used for 2,040 hours during year 1, 1,581 hours in year 2, and 1,479 hours in year 3.

1. determine the amount of depreciation expense for the three years ending December 31, year 1, year 2, year 3, 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.

2. What method told the higher depreciation expense for year 1?

3. What method yields the most depreciation over the three year life of the equipment?

Answer 1

1.

Straight line depreciation expense = (Cost - Residual Value) / Years

= ($444,800 - $36,800) / 3

= $136,000

Depreciation expense Year 1 = $136,000

Depreciation expense Year 2 = $136,000

Depreciation expense Year 3 = $136,000

Units of activity method

Accumulated depreciation = Cost - Residual Value

= $444,800 - $36,800

= $408,000

Depreciation expense Year 1 = $408,000 * (2,040 / 5,100)

= $408,000 * (2,040 / 5,100)

= $163,200

Depreciation expense Year 2 = $408,000 * (1,581 / 5,100)

= $126,480

Depreciation expense Year 3 = $408,000 * (1,479 / 5,100)

= $118,320

Double declining balance method

Double declining balance rate = Straight line depreciation rate * 2

= (100 / 3) * 2

= 66.66667 or 2/3

Depreciation expense Year 1 = $444,800 * (2/3)

= $296,533

Depreciation expense Year 2 = ($444,800 - $296,533) * (2/3)

= $98,845

Depreciation expense Year 3 = ($444,800 - $296,533 - $98,845 - $36,800)

= $12,622

2.

Double declining balance method yields the highest depreciation expense for year 1.

3.

All the three methods yields the most depreciation over the three year life of the equipment. Accumulated depreciation is same in all the three years.