Question

Monte’s Coffee Company purchased packaging equipment on January 5, 2014, for $90,000. The equipment was expected to have a useful life of three years, or 20,000 operating hours, and a residual value of $6,000. The equipment was used for 8,900 hours during 2014, 7,100 hours in 2015, and 4,000 hours in 2016.
Required:
1. Determine the amount of depreciation expense for the years ended December 31, 2014, 2015, and 2016 by (a) the straight-line method, (b) the units-of-output method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the three years by each method. (Note: For DECLINING BALANCE ONLY, round the answer for each year to the nearest whole dollar.)
2. What method yields the highest depreciation expense for 2014?
3. What method yields the most depreciation over the three-year life of the equipment?

1. Determine the amount of depreciation expense for the years ended December 31, 2014, 2015, and 2016 by (a) the straight-line method, (b) the units-of-output method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the three years by each method.

Depreciation Expense

1

Year

Straight-Line Method

Units-of-Output Method

Double-Declining-Balance Method

2

2014

3

2015

4

2016

5

Total



2. What method yields the highest depreciation expense for 2014?

Straight-line method
Units-of-output method
Double-declining-balance method
All three depreciation methods
3. What method yields the most depreciation over the three-year life of the equipment?

Straight-line method
Units-of-output method
Double-declining-balance method
All three depreciation methods

Answer 1

Answer:

1.a

2014 Depreciation

Straight line method $28,000

Units-of-output $37,380

Double declining balance $60,000

2015 Depreciation

Straight line method $28,000

Units-of-output $29,820

Double declining balance $20,000

2016 Depreciation

Straight line method $28,000

Units-of-output $16,800

Double declining balance $6,667

1.B Total Depreciation in 3 years

Straight line method $84,000

Units-of-output $84,000

Double declining balance $86,667

2. Double declining balance yields the highest depreciation expense for 2014

3. Double declining balance yields the highest depreciation expense over the three-year life of an equipment

Explanation:

1.A In computing straight line method, the formula would be:

(cost of equipment - salvage value) / life of equipment

2014

(90,000 - 6,000) / 3 years = 28,000

2015

(90,000 - 6,000) / 3 years = 28,000

2016

(90,000 - 6,000) / 3 years = 28,000

TOTAL DEPRECIATION IN 3 YEAR LIFE OF EQUIPMENT = $84,000 ($28,000 + $28,000 + $28,000)

UNITS-OF-OUTPUT METHOD

Formula: (Cost of equipment - salvage value) / total operating hours of equipment x operating hours used for the year

2014

($90,000 - 6,000) / 20,000 x 8,900

($84,000 / 20,000) x 8,900

$4.2 per hour x 8,900 = $37,380

2015

($90,000 - 6,000) / 20,000 x 7,100

($84,000 / 20,000) x 7,100

$4.2 per hour x 7,100 = $29,820

2016

($90,000 - 6,000) / 20,000 x 4,000

($84,000 / 20,000) x 4,000

$4.2 per hour x 4,000 = $16,800

TOTAL DEPRECIATION IN 3 YEAR LIFE OF EQUIPMENT = $84,000 ($37,380 + $29,820 + $16,800)

DOUBLE DECLINING BALANCE

Formula: 100%/life of equipment x 2

*residual value will not be considered in this method of computation of depreciation expense.

2014

100% / 3 years x 2 = 66,67%

90,000 x 66.67% = $60,000

2015

100% / 3 years x 2 = 66,67%

$90,000 - $60,000 = $30,000

$30,000 x 66.67% = $20,000

2016

100% / 3 years x 2 = 66,67%

$90,000 - ($60,000 + $20,000) = $10,000

$10,000 x 66.67% = $6,667

TOTAL DEPRECIATION IN 3 YEAR LIFE OF EQUIPMENT = $86,667 ($60,000 + $20,000 + $6,667)

2. Double declining method yields the highest depreciation expense in 2014 in the amount of $60,000 as computed above.

3. The method that yields most depreciation over the three-year life of an equipment is the DOUBLE DECLINING METHOD in a total amount of $86,667.