Question

University Car Wash built a deluxe car wash across the street from campus. The new machines cost $234,000 including installation. The company estimates that the equipment will have a residual value of $27,000. University Car Wash also estimates it will use the machine for six years or about 12,000 total hours. Actual use per year was as follows:
Year Hours Used
1 2,800
2 1,900
3 2,000
4 2,000
5 1,800
6 1,500

Required:
a. Prepare a depreciation schedule for six years using the straight-line method.
b. Prepare a depreciation schedule for six years using the double-declining-balance method.
c. Prepare a depreciation schedule for six years using the activity-based method.

Answer 1

Answer:

University Car Wash

a. Straight-line Method:

Year  Cost            Depreciation   Accumulated     Net  Book

                                  Expense       Depreciation       Balance

1        $234,000         $34,500          $34,500         $199,500

2       $234,000         $34,500          $69,000        $165,000        

3       $234,000         $34,500         $103,500        $130,500

4       $234,000         $34,500         $138,000         $96,000  

5       $234,000         $34,500         $172,500         $61,500        

6       $234,000         $34,500        $207,000        $27,000                  

b. Double-Declining-Balance Method:

Year  Cost            Depreciation   Accumulated     Net  Book

                                  Expense     Depreciation       Balance

1        $234,000        $77,220          $77,200        $156,780

2       $234,000         $51,737         $128,937       $105,043

3       $234,000        $34,664         $163,601         $70,379

4       $234,000        $23,225        $186,826         $47,154

5       $234,000         $15,561        $202,387         $31,583

6      $234,000           $4,593       $206,980        $27,000

c. Activity-Based Method:

Year  Cost            Depreciation   Accumulated     Net  Book

                                  Expense       Depreciation       Balance

1        $234,000        $48,300          $48,300          $185,700

2       $234,000        $32,775           $81,075          $152,925

3       $234,000       $34,500          $115,575           $118,425

4       $234,000       $34,500         $150,075           $83,925

5       $234,000        $31,050          $181,125           $52,875

6      $234,000        $25,825       $206,950          $27,050

Explanation:

a) Data and Calculations:

Cost of new machines = $234,000

Residual value of equipment = $27,000

Depreciable amount = $207,000

Estimated useful life = 6 years

Straight-line depreciation expense per annum = $34,500 ($207,000/6)

Double-declining-balance rate = 33% (100%/6 * 2)

Year  Depreciation  Declining Balance

1          $77,220           $156,780

2         $51,737            $105,043

3        $34,664             $70,379

4        $23,225             $47,154

5         $15,561              $31,583

6          $4,593             $27,000

Estimated useful life in hours = 12,000

Depreciation rate per hour = $17.25 ($207,000/12,000)

Actual usage per year:

Year Hours Used  Usage Charge

1           2,800            $48,300 (2,800 * $17.25)

2          1,900             $32,775 (1,900 * $17.25)

3         2,000             $34,500 (2,000 * $17.25)

4         2,000             $34,500 (2,000 * $17.25)

5         1,800              $31,050 (1,800 * $17.25)

6         1,500              $25,825 (1,500 * $17.25)