Question

Dexter industries purchased packaging equipment in January 8 for $329,600. The equipment was expected to have a useful life of three years, or 7,200 operating hours, and a residual value of $27,200. The equipment was used for 2,880 hours during year 1. 2,232 hours in year 2, and 2,088 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 three years by each method.

*for all method, round the answer for each year to the nearest whole dollar.*

2.) what method yields the highest depreciation expense for year 1?

3.) what methods yield the most depreciation over the three year life of the equipment?

Comparing Three Depreciation Methods Dexter Industries purchased packaging equipment on January 8 for $329,600. The equipment was expected to have a useful life of three years, or 7,200 operating hours, and a residual value of $27,200. The equipment was used for 2,880 hours during Year 1, 2,232 hours in Year 2, and 2,088 hours in Year 3. Required: 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. Note: For all methods, round the answer 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 1. 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.)

Depreciation Expense
Year	Straight-Line-Method	Units of Activity Method	Double Declining Balance Method
Year 1	$100,800	$120,960	$2,19,733.3
Year 2	$100,800	$93,744	$73,244.46
Year 3	$100,800	$87,696	$9,422.22
Total	$302,400	$302,400	$302,400

Workings:

a. Straight line method

Straight line depreciation rate = 1/ number of useful life

=1/3

=33.33%

FORMULA ( Cost Of Asset-Salvage Value) / Useful Life Of Asset

Annual Depreciation Expense

Where:

· Cost of the asset is the purchase price of the asset

· Salvage value is the value of the asset at the end of its useful life

· Useful life of asset represents the number of periods/years in which the asset is expected to be used by the company.

here,

  Cost of the asset =   $329,600

Salvage value = $27,200

Useful life of asset = 3 years

therefore ($329,600 - $27,200) / 3

Annual Depreciation Expense

= $302,400 / 3

= 100,800 each year

.

b). Declining Balance depreciation method

Declining Balance Method of Depreciation also called as reducing balance method where assets is depreciated at a higher rate in the initial years than in the subsequent years. Under this method, a constant rate of depreciation is applied to an asset’s (declining) book value each year. This method results in accelerated depreciation and results in higher depreciation values in the early years of the life of an asset.

Declining Balance depreciation rate = acceleration rate * Straight line depreciation rate

= 2(assumed) value * 33.33%

= 66.66%

equation for calculating Declining Balance depreciation =

book value of the asset at the beginning of the year * Declining Balance depreciation rate

Year	Depreciation	Depreciation	Value at the end of the year
1	$329,600 * 66.66%	$2,19,733.3	$1,09,866.68
2	$1,09,866.68 * 66.66%	$73,244.46	$36,622.22
3	=$36,622.22 - $27,200	$9,422.22	$27,200

3).Units of Production depreciation method

The preceding depreciation methods are based on time. The units-of-Activity method is based on actual physical usage of the asset during a given period. Under the units-of- Activity method, an estimate is made of the number of hours the asset will be able to work over its useful life. The depreciation rate per unit produced is calculated as the cost less the estimated salvage value divided by the estimated number of hours to be produced over the asset’s estimated useful life.

Depreciation Rate = Cost Less Salvage Value / Estimated number of hours to be worked by the asset over its   estimated useful life

here,

  Cost Less Salvage Value= $329,600 - $27,200

=$302,400

Estimated number of hours of work that can be done by the asset during its estimated useful life = 7,200 hours

$//img.homeworklib.com/questions/3b11d510-195c-11eb-8ba6-55fbfbea8258.png?x-oss-process=image/resize,w_560$Therefore, Depreciation Rate = $302,400 / 7200 Hours

= $42 per Hour

Depreciation = Depreciation Rate * number of units produced

Year	Estimated Hours	Depreciation	Depreciation
1	2,880	2,880 × $42	$120,960
2	2,232	2,232 × $42	$93,744
3	2,088	2,088 × $42	$87,696

.

2.) Double Declining Balance Method

This method results in accelerated depreciation and results in higher depreciation values in the early years of the life of an asset.

3.) All three methods

All three methods will yield the same amount of depreciation over the three years. This is because the life of the asset is 3 years and the total depreciation charged through any method will be the same. but during the intermediate years the depreciation charged will be different.