Question

Dexter Industries purchased packaging equipment on January 8 for $108,000. The equipment was expected to have a useful life of three years, or 27,000 operating hours, and a residual value of $5,400. The equipment was used for 10,800 hours during Year 1, 8,100 hours in Year 2, and 8,100 hours in Year 3.

Required:
Determine the amount of depreciation expense for the three years ending December 31, by:
(a) the straight-line method,
(b) the units-of-activity method, and
(c) the double-declining-balance method. Also determine the total depreciation expense for the three years by each method. Round the final answers for each year to the nearest whole dollar.

Answer 1

a.

Year 1 = $34,200

Year 2 = $34,200

Year 3 = $34,200

Total = $102,600

b.

Year 1 = $41,040

Year 2 = $30,780

Year 3 = $30,780

Total = $102,600

c.

Year 1 = $71,993

Year 2 = $24,002

Year 3 = $6,605

Total = $102,600

Step-by-step explanation:

Straight Line Method

Depreciation Expense = Cost - Residual amount ÷ Estimated useful life

therefore,

Depreciation Expense = ($108,000 - $5,400) ÷ 3 = $34,200

This charge will be the same from Year 1 through Year 3 because its straight line !

Units-of-activity method

Depreciation Charge = Activity rate x activity during the period

where,

Activity rate = Cost - Residual amount ÷ Estimated operating hours

= ($108,000 - $5,400) ÷ 27,000 hours

= $3.80

Year 1

Depreciation Charge = $3.80 x 10,800 hours = $41,040

Year 2

Depreciation Charge = $3.80 x 8,100 hours = $30,780

Year 3

Depreciation Charge = $3.80 x 8,100 hours = $30,780

Double Declining Balance Method

Depreciation Charge = 2 x SLDP X BVSLDP

where,

SLDP = 100 ÷ number of years

= 100 ÷ 3

= 33.33 %

Year 1

Depreciation Charge = 2 x 33.33 % x $108,000

= $71,992.80

Year 2

Depreciation Charge = 2 x 33.33 % x ($108,000 - $71,992.80)

= $24,002

Year 3

Depreciation Charge = 2 x 33.33 % x ($108,000 - $71,992.80 - $24,002)

= $8,002.67

However

In Year 3 depreciation will decrease the book value of the asset below its salvage value :

Do the Test :

Year 2 Book Value $12,005

Less Year 3 Depreciation ($8,003)

Year 3 Book Value $4,002

With double-declining-balance method, Depreciation will only be allowed to the point where :

Book Value = Salvage amount

Therefore, Depreciation for year 3 will be :

Year 2 Book Value $12,005

Less Salvage amount ($5,400)

Year 3 Depreciation $6,605