Question

Dexter Industries purchased packaging equipment on January 8 for $72,000. The equipment was expected to have a useful life of three years, or 18,000 operating hours, and a residual value of $4,500. The equipment was used for 7,600 hours during Year 1, 6,000 hours in Year 2, and 4,400 hours in Year 3.1. Determine the amount of depreciation expense for the three years ending December 31, 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. Depreciation Expense1 Year Straight-Line Method Units-of-Activity Method Double-Declining-Balance Method2 Year 13 Year 24 Year 35 Total2. What method yields the highest depreciation expense for Year 1?a. Straight-line methodb. Units-of-output methodc. Double-declining-balance methodd. All three depreciation methods3. What method yields the most depreciation over the three-year life of the equipment?a. Straight-line methodb. Units-of-output methodc. Double-declining-balance methodd. All three depreciation methods

Answer 1

Explanation:

The computation is shown below:

a) Straight-line method:

= (Purchased cost of packaging equipment - residual value) ÷ (expected useful life)

= ($72,000 - $4,500) ÷ (3 years)

= ($67,500) ÷ (3 years)  

= $22,500

In this method, the depreciation is same for all the remaining useful life

So for all years, the total depreciation is

= $22,500 × 3 years

= $67,500

(b) Double-declining balance method:

First we have to find the depreciation rate which is shown below:

= One ÷ expected useful life

= 1 ÷ 3

= 33.33%

Now the rate is double So, 66.67%

In year 1, the original cost is $72,000, so the depreciation is $48,000 after applying the 66.67% depreciation rate

And, in year 2, it would be

= ($72,000 - $48,000) × 66.67%

= $16,000

And, in year 3, it would be

= $67,500 - $48,000 - $16,000

= $3,500

So the total depreciation is

= $48,000 + $16,000 + $3,500

= $67,500

(c) Units-of-production method:

= (Purchased cost of packaging equipment - residual value) ÷ (estimated operating hours)  

= ($72,000 - $4,500) ÷ (18,000 hours)

= ($67,500) ÷ (18,000 hours)  

= $3.75 per hour

For first year

= 7,600 × $3.75 per hour

= $28,500

For second year

= 6,000 × $3.75 per hour

= $22,500

For third year

= 4,400 × $3.75 per hour

= $16,500

So, the total depreciation is

= $28,500 + $22,500 + $16,500

= $67,500

2. By above calculations, we concluded that the double declining method yields higher depreciation expense in year 1 i.e $48,000

3. By above calculations, we concluded that the all depreciation methods yields most depreciation over the three-year life of the equipment