Question

Hawaiian Specialty Foods purchased equipment for $12,000. Residual value at the end of an estimated four-year service life is expected to be $1,200. The machine operated for 1700 hours in the first year, and the company expects the machine to operate for a total of 10,000 hours. Calculate depreciation expense for the first year using each of the following depreciation methods: (1) straight-line. (2) double- declining balance, and (3) activity-based. (Do not round your intermediate calculations.) Depreciation Expense (1) Straight line (2) Double-declining balance (3) Activity-based

Answer 1

Cost of equipment = $12,000

Residual value = $1,200

Useful life = 4 years

Expected hours of operation = 10,000

Hours operated in first year = 1,700

1)

Annual depreciation expense = (Cost of equipment - Residual value)/Useful life

= (12,000 - 1,200)/4

= 10,800/4

= $2,700

2)

Double declining depreciation rate = 2 x 1/Useful life

= 2 x 1/4

= 50%

Depreciation expense for first year = Cost of equipment x Double declining depreciation rate

= 12,000 x 50%

= $6,000

3)

Depreciation expense per hour = (Cost of equipment - Residual value)/Expected hours of operation

= (12,000 - 1,200)/10,000

= 10,800/10,000

= $1.08

Depreciation expense for first year = Depreciation expense per hour x Hours operated in first year

= 1.08 x 1,700

= $1,836

	Depreciation expense
Straight line	$2,700
Double declining	$6,000
Activity based	$1,836

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