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.

Answer 1

Answer:

1. $2,100

2. $5,000

3.  $3,360

Explanation:

The computation of the depreciation expense for the first year is shown below:

a) Straight-line method:

= (Original cost - residual value) ÷ (service life)

= ($25,000 - $4,000) ÷ (10 years)

= ($21,000) ÷ (10 years)  

= $2,100

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

(b) Double-declining balance method:

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

= One ÷ useful life

= 1 ÷ 10

= 10

Now the rate is double So, 20%

In year 1, the original cost is $25,000, so the depreciation is $5,000 after applying the 20% depreciation rate

(c) Activity based method:

= (Original cost - residual value) ÷ (estimated production hours)  

= ($25,000 - $4,000) ÷ ($10,000 hours)

= ($21,000) ÷ ($10,000 hours)  

= $2.10 per hours

Now for the first year, it would be  

= Production hours in first year × depreciation per hours

= 1,600 hours × $2.10

= $3,360