Question

Obj. 2Waylander Coatings Company purchased waterproofing equipment on January 6 for $320,000. The equipment was expected to have a useful life 3 years or of four years, or 20,000 operating hours, and a residual value of $35,000. The equipment was used for 7,200 hours during Year 1, 6,400 hours in Year 2, 4,400 hours in Year 3, and 2,000 hours in Year 4. Instructions Show Me Now Excel Determine the amount of depreciation expense for the years ended December 31, Year 1, Year 2, Year 3, and Year 4, 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 four years by each method. The following columnar headings are suggested for recording the depreciation expense amounts:

Answer 1

Depreciation expense for Year 1 Year 2 Year 3 Year 4

Method: Straight-line $71,250 $71,250 $71,250 $71,250

unit-of-production $102,600 $91,200 $62,700 $28,500

Double-declining $160,000 $80,000 $40,000 $20,000

Total depreciation for the four years under:

• straight-line is $285,000
• unit-of-production is $285,000
• double-declining is $300,000

Step-by-step explanation:

(A) Under straight-line method, depreciation expense is (cost - residual value) / Estimated useful life = ($320,000 - $35,000) / 4 years = $71,250 yearly depreciation expense.

Accumulated depreciation for 4 years is $71,250 x 4 years $285,000.

The net book value (NBV) of the asset (cost - accumulated depreciation) is at the end of Year 4: $320,000 - $285,000 = $35,000.

(B) 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: ($320,000 - $35,000) / 20,000 operating hours x 7,200 hours = $102,600/year

At Year 2, depreciation expense (DE) is: ($320,000 - $35,000) / 20,000 operating hours x 6,400 hours = $91,200/year

At Year 3, depreciation expense (DE) is: ($320,000 - $35,000) / 20,000 operating hours x 4,400 hours = $62,700/year

At Year 4, depreciation expense (DE) is: ($320,000 - $35,000) / 20,000 operating hours x 2,000 hours = $28,500/year

Accumulated depreciation for 4 years is $102,600 + $91,200 + $62,700 + $28,500 = $285,000.

Note that this depreciation method results in higher depreciation charge when the asset is heavily used, at this time, it was in Year 1.

The NBV under this method is is: $320,000 - $285,000 = $35,000.

(C) 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%/4 years = 25%, then 25% multiplied by 2 to give 50%

At Year 1, 50% X $320,000 = $160,000

At Year 2, 50% X $160,000 ($320,000 - $160,000) = $80,000

At Year 3, 50% X $80,000 ($160,000 - $80,000) = $40,000

At Year 4, 50% X $40,000 ($80,000 - $40,000) = $20,000

Accumulated depreciation for 4 years is $160,000 + $80,000 + $40,000 + $20,000 = $300,000.

The NBV under this method is is: $320,000 - $300,000 = $20,000.