Question

Equipment purchased at the beginning of the fiscal year for $360,000 is expected to have a useful life of 5 years, or 14,000 operating hours, and a residual value of $10,000. Compute the depreciation for the first and second years of use by each of the following methods: (a) straight-line (b) units-of-output (1,200 hours first year; 2,250 hours second year) (c) double-declining-balance

Answer 1

Answer:

For (A) year 1 and year 2 is $70,000 respectively.

For (B) year 1 is $30,000 and year 2 is $56,250

For (C)  year 1 is  $140,000  and year 2 is $84,000 respectively.

Explanation:

Straight Line method : In straight line method, the amount of depreciation is remain same over a useful life.

Units of output: In this method, the depreciation is charged based on the material output or labor output rather than useful life.

Double Declining method : In this method, the depreciation is charged double on the amount which is come from straight line method.

(a). Straight Line method Formula :

= (Purchase price - Residual value ) ÷ Useful life

= ($360,000 - $10,000) ÷ 5

= $70,000

Since in straight line method, the depreciation amount is same for all years. So, for year 1 and for year 2 the depreciation is $70,000 respectively.

(b). Unit of output Formula

= (Purchase price - Residual Hours) ÷ total number of hours × Per year  Hours )

For year 1 = ($360,000 -10,000 ) ÷  14000 × 1200

= $30,000

For year 2  =  ($360,000 -10,000 ) ÷  14000 × 2250

= $56,250

(c) Double Declining method:

For year 1 = 2 × year 1 straight line method depreciation

= 2 × 70,000

= $140,000

For year 2 = 2 × (cost of asset - residual value - year 1  double declining method depreciation) × Rate

= 2 × ($350,000 - 10,000 - 140,000 ) × 40%

=$84000

where rate = (1 ÷ useful life) × 100 × 2 = (1 ÷ 5)× 100×2 = 40%

Hence, for (A) year 1 and year 2 is $70,000 respectively.

For (B) year 1 is $30,000 and year 2 is $56,250

For (C)  year 1 is  $140,000  and year 2 is $84,000 respectively.