Question

Dexter Industries purchased packaging equipment on January 8 for $98,000. The equipment was expected to have a useful life of three years, or 20,000 operating hours, and a residual value of $6,000. The equipment was used for 8,980 hours during Year 1, 6,930 hours in Year 2, and 4,090 hours in Year 3. Required: 1. Determine the amount of depreciation expense for the three years ended 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. (Note: For STRAIGHT-LINE ONLY, round the first two years to the nearest whole dollar, then round the third year as necessary. For DECLINING BALANCE ONLY, round the multiplier to five decimal places. Then round the answer for each year to the nearest whole dollar.) 2. What method yields the highest depreciation expense for Year 1? 3. What method yields the most depreciation over the three-year life of the equipment?

Answer 1

Answer:

1.

A. Years 1 =$30,667

Year 2 = $30,667

Years 3 =$30,666

B. Year 1 = $41,308

Year 2 = $31,878

Year 3 = $18,814

C. Year 1 = $65,333

Year 2 = $21,778

Year 3 = $7260

2. The double declining method

3. The double declining method

Explanation:

Straight line depreciation =( Cost of equipment - Salvage value) / useful life

($98,000 - $6,000) / 3 = $30,666.67

Depreciation expense each year = $30,666.67

Deprecation expense for

Year 1 =$30,667

Year 2 = $30,667

Year 3 = $92,000 - $30667 = $30,666

Total depreciation = $92,000

Deprecation expense under the unit of activity method = actual operating hours each year × (cost of asset - Salvage value) / estimated total operating hours

For year 1 = 8,980 × ($92,000 / 20,000) = 8980 × 4.6 = $41,308

For year 2 = 6,930 × 4.6 = $31,878

For year 3 = 4090 × 4.6 = $18,814

Total depreciation = $92,000

For double declining method :

Depreciation expense = Net book value × multiplier

Multiplier = 2 × (1 / useful life)

2 × (1/3) = 0.66667

Net book value × multiplier

For year 1 = 0.66667 × $98,000 =$65,333

Net book value = $98,000 - $65,333 = $32,667

For year 2 = 0.66667 × $32,667 = $21,778

Net book value = $32,667 - $21,778 = $10,889

For year 3 = 0.66667 × $10,889= $7260

Total depreciation = $94,371