Answer:
Depreciation expense under:
- the Straight-line method for Years 1 to 4 is $71,000.
- the Units-of-production method for Years 1 to 4 is $71,000.
- the Double-declining-balance method is $75,000.
Explanation:
Under straight-line method, depreciation expense is (cost - residual value) / No of years = ($80,000 - $9,000) / 4 years = $17,750 yearly depreciation expense.
Depreciation expense for Years 1 to 4 is $17,750 x 4 years $71,000.
The unit-of-production method is used when the asset value closely relates to the units of output it is able to produce. It is expressed with the formula below:
(Original Cost - Salvage value) / Estimated production capacity x Units/year
At Year 1, depreciation expense (DE) is: ($80,000 - $9,000) / 710,000 units x 213,000 units = $21,300
At Year 2, DE = $71,000 / 710,000 units x 156,200 units = $15,620
At Year 3, DE = $71,000 / 710,000 units x 195,250 units = $19,525
At Year 4, DE = $71,000 / 710,000 units x 145,550 units = $14,555
Note that this depreciation method results in higher depreciation charge when the asset is heavily used, at this time, it was in Year 1, followed by Year 2.
Depreciation expense for Years 1 to 4, under this method, is $71,000 (addition of all the yearly depreciation).
The double-declining method is otherwise known as the reducing balance method and is given by the formula below:
Double declining method = 2 X SLDP X BV
SLDP = straight-line depreciation percentage
BV = Book value
SLDP is 100%/4years = 25%, then 25% multiplied by 2 to give 50%
At Year 1, 50% X $80,000 = $40,000
At Year 2, 50% X $40,000 ($80,000 - $40,000) = $20,000
At Year 3, 50% X $20,000 ($40,000 - $20,000) = $10,000
At Year 4, 50% X $10,000 ($20,000 - $10,000) = $5,000 (the depreciation expense would stop at this stage since the amount falls below the residual value).
Depreciation expense for Years 1 to 4, under this method, is $75,000 (addition of all the yearly depreciation).
