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.
