Question

Super Saver Groceries purchased store equipment for $25,000. Super Saver estimates that at the end of its 10-year service life, the equipment will be worth $4,000. During the 10-year period, the company expects to use the equipment for a total of 10,000 hours. Super Saver used the equipment for 1,600 hours the first year.
Required: Calculate depreciation expense of the equipment for the first year, using each of the following methods.

1. Straight-line.

2. Double Declining Method.

3. Activity Based.

Answer 1

Answer:

Depreciation expense for the first year under each method is,

1. Straight line method = $2100

2. Double declining balance method = $5000

3. Activity based method = $3360

Explanation:

1.

The straight line method of depreciation charges a constant amount of depreciation expense through out the useful life of the asset. The formula for depreciation expense per year under this method is,

The depreciation rate under this method is,

Depreciation rate = 100% / 10 = 10%

Depreciation expense = (Cost - Salvage value) / estimated useful life

Depreciation expense = (25000 - 4000) / 10    = $2100 per year

2.

Double declining method is an accelerated method of allocating the depreciation expense. The initial years depreciation is higher in this method. The formula for depreciation expense per year under this method is,

Depreciation expense = 2 * Straight line rate * Carrying value of asset at start of period

Depreciation expense = 2 * 0.1 * 25000        = $5000 for the first year

3.

Under activity based method, we simply allocate depreciation based on the activity level for which asset is used this year. The formula for this method is,

Depreciation expense = Units of activity for the year * (Cost - Salvage value) / Total estimated life in units of activity

Depreciation expense = 1600 * (25000 - 4000) / 10000

Depreciation expense = $3360 for the first year