Question

Hawaiian Specialty Foods purchased equipment for $12,000. Residual value at the end of an estimated four-year service life is expected to be $1,200. The machine operated for 1,700 hours in the first year, and the company expects the machine to operate for a total of 10,000 hours. Calculate depreciation expense for the first year using each of the following depreciation methods:

(1) straight-line,
(2) double-declining-balance, and
(3) activity-based.

Answer 1

1. $2,700

2. $6,000

3. $1,836

Step-by-step explanation:

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

1) Straight-line method:

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

= ($12,000 - $1,200) ÷ (4 years)

= ($10,800) ÷ (4 years)

= $2,700

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

2) Double-declining balance method:

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

= One ÷ useful life

= 1 ÷ 4

= 25%

Now the rate is double So, 50%

In year 1, the original cost is $12,000, so the depreciation is $6,000 after applying the 50% depreciation rate

3) Units-of-production method:

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

= ($12,000 - $1,200) ÷ ($10,000 hours)

= ($10,800) ÷ ($10,000 hours)

= $1.08 per hour

Now for the first year, it would be

= Machine hours in first year × depreciation per hour

= 1,700 machine hours × $1.08

= $1,836