Answer:
1.a
2013 Depreciation
Straight line method $71,250
Units-of-output $102,600
Double declining balance $160,000
2014 Depreciation
Straight line method $71,250
Units-of-output $91,200
Double declining balance $80,000
2015 Depreciation
Straight line method $71,250
Units-of-output $62,700
Double declining balance $40,000
2016 Depreciation
Straight line method $71,250
Units-of-output $28,500
Double declining balance $20,000
1.B Total Depreciation in 4 years
Straight line method $285,000
Units-of-output $285,000
Double declining balance $300,000
2. Double declining balance yields the highest depreciation expense for 2013
3. Double declining balance yields the highest depreciation expense over the FOUR-year life of an equipment
Explanation:
1.A In computing straight line method, the formula would be:
(cost of equipment - salvage value) / life of equipment
2013
(320,000 - 35,000) / 4 years = 71,250
2014
(320,000 - 35,000) / 4 years = 71,250
2015
(320,000 - 35,000) / 4 years = 71,250
2016
(320,000 - 35,000) / 4 years = 71,250
TOTAL DEPRECIATION IN 4 YEAR LIFE OF EQUIPMENT = $285,000 ($71,250 + $71,250 + $71,250 + $71,250)
<em>UNITS-OF-OUTPUT METHOD</em>
Formula: (Cost of equipment - salvage value) / total operating hours of equipment x operating hours used for the year
2013
($320,000 - 35,000) / 20,000 x 7,200
($285,000 / 20,000) x 7,200
14.25 per hour x 7,200 =$102,600
2014
($320,000 - 35,000) / 20,000 x 6,400
($285,000 / 20,000) x 6,400
14.25 per hour x 6,400 =$91,200
2015
$320,000 - 35,000) / 20,000 x 4,400
($285,000 / 20,000) x 4,400
14.25 per hour x 4,400 =$62,700
2016
($320,000 - 35,000) / 20,000 x 2,000
($285,000 / 20,000) x 2,000
14.25 per hour x 2,000 =$28,500
TOTAL DEPRECIATION IN 3 YEAR LIFE OF EQUIPMENT = $285,000 ($102,600 + $91,200 + $62,700 + $28,500)
DOUBLE DECLINING BALANCE
Formula: 100%/life of equipment x 2
*residual value will not be considered in this method of computation of depreciation expense.
2013
100% / 4 years x 2 = 50%
$320,000 x 50% = $160,000
2014
100% / 4 years x 2 = 50%
$320,000 - $160,000 =$160,000
$160,000 x 50% = $80,000
2015
100% / 4 years x 2 = 50%
$320,000 - ($160,000 + $80,000) = $80,000
$80,000 x 50% = $40,000
2016
100% / 4 years x 2 = 50%
$320,000 - ($160,000 + $80,000 + $40,000) = $40,000
$40,000 x 50% = $20,000
TOTAL DEPRECIATION IN 3 YEAR LIFE OF EQUIPMENT = $300,000 ($160,000 + $80,000 + $40,000 + $20,000)
2. Double declining method yields the highest depreciation expense in 2013 in the amount of $160,000 as computed above.
3. The method that yields most depreciation over the four-year life of an equipment is the DOUBLE DECLINING METHOD in a total amount of $300,000.