Answer:
<h2>Dexter Industries</h2>
1. Depreciation Expense for the three years ending December 31:
i) Straight-line Method:
Depreciation charge = (Cost - Residual Value)/Useful life
= Depreciable amount/useful life
Annual Depreciation = ($72,000 - $4,500)/3 = $22,500
Depreciation Expense:
Year 1 $22,500
Year 2 $22,500
Year 3 $22,500
ii) Units-of-Activity Method
Depreciable amount x (hours used/useful life in hours)
or Depreciable amount per hour x hours used
Depreciable amount = $72,000 - $4,500 = $67,500
Depreciation Expense:
Year 1 $28,500 (7,600/18,000 x $67,500) or 7,600 x $3.75
Year 2 $22,500 (6,000/18,000 x $67,500) or 6,000 x $3.75
Year 3 $16,500 (4,400/18,000 x $67,500) or 4,400 x $3.75
iii) Double-Declining-Balance Method
Steps:
Divide 100/useful life = 33.33333%. This is the straight-line percentage.
Multiply this by 2, to obtain the percentage for double-declining method.
This gives 66.66666%
Depreciation Expenses:
Year 1 = $48,000 ($72,000 x 66.66666%)
Year 2 = $16,000 (($72,000 - $48,000) x 66.66666%))
Year 3 = $3,500 not $5,000 (($72,000 - $48,000 - $16,000) x 66.66666%))
The last year's depreciation cannot exceed the book value less the residual value.
1B) Total Depreciation Expense for the three years by each method:
i) Straight-line Method
Total Depreciation = $22,500 x 3 = $67,500
ii) Units-of-Activity Method
Total Depreciation = $67,500 ($28,500 + 22,500 + 16,500)
iii) Double-Declining-Balance Method
Total Depreciation = $67,500 ($48,000 + 16,000 + 3,500)
2. The method that yields the highest depreciation expense for Year 1:
The Double-Declining-Balance Method
3. The method that yields the most depreciation over the three-year life of the equipment:
None. They yield the same total depreciation because of the presence of the residual value.
Explanation:
1) Cost of Equipment = $72,000
Useful Life = 3 years or 18,000 operating hours
Residual Value = $4,500
2) Depreciation is systematic reduction of the recorded cost of a long-term asset until the asset's value becomes zero or negligible. It is an accounting estimate based on the entity's judgement. It is a way of spreading the cost of a noncurrent asset in accordance with the accrual concept and matching principle over the periods that benefit from the long-term asset. There are many methods which can be adopted.
