Question

Hawaiian Specialty Foods purchased equipment for $30,000. Residual value at the end of an estimated four-year service life is expected to be $3,000. The machine operated for 3,100 hours in the first year, and the company expects the machine to operate for a total of 20,000 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.)

Answer 1

Answer:

1. $6750

2. $15000

3. $4185

Explanation:

1. Straight-Line Method:

This is calculated by finding the difference between the asset's cost and salvage value and then dividing it by the number of years it will be used. It is the simplest method of calculating depreciation and believes that the asset's value depreciates equally every year.

Total asset depreciation over 4 years = $30,000 - $3000 = $27000

Depreciation for Year 1 = $27000 / 4 = $6750

2. Double-declining balance Method:

This is where the asset's value is depreciated at twice the rate than the straight line method. The depreciation amounts would be higher in the early years of the asset's life and gradually reduce towards the end. Hence, it does not mean that the depreciation amount would be higher than the straight line basis.

Straight Line depreciation per year = 1/4 x 100 = 25%

Hence double-depreciation value = 25% x 2 = 50%

Cost of asset Year 1 = $30,000

Depreciation for Year 1 = $30,000 x 50% = $15000

3. Activity-based Method:

This is where the depreciation expense is calculated based on the level of activity of the asset in that year or period. Level of activity can be either the number of units produced or the number of hours worked. Instead of depreciating based on time, it depreciates based on usage and activity.

Total asset depreciation over 4 years = $30,000 - $3000 = $27000

Operated for total of 20,000 hours

Per hour depreciated value = $27000 / 20000 = $1.35 per hour

First year hours worked = 3,100

Depreciation for Year 1 = 3,100 x $1.35 = $4185