Question

On April 1, 2013, Four Seasons Landscaping, LLC purchased new lawn mowers for $70,000 in cash (total cost). They have a useful life of 3 years and a $10,000 residual value. Over its life, each machine is estimated to run 1,200 engine hours (EH), 500 EH in 2013, 400 EH in 2014 and 300 EH in 2015 (Assume these to be actual hours, as well). As of December 31, compute the amount of depreciation for each of the years indicated under the three different methods of depreciation: Use whole dollars in your answers. Show only the depreciation expense for each year, you do not need to show the accumulated depreciation!

Answer 1

Please see the calculation explanation below and the depreciation expense chart for all methods is attached.

Step-by-step explanation:

1. STRAIGHT-LINE DEPRECIATION METHOD:

Depreciation Expense = (Total Cost - Residual Value) / Useful Life

Depreciation Expense = ($70,000 - $10,000) / 3 years

Depreciation Expense = $60,000 / 3 years

Depreciation Expense = $20,000 per year

2. DOUBLE DECLINING BALANCE DEPRECIATION METHOD:

Depreciation Expense Rate = (100% / Useful Life) x 2

Depreciation Expense Rate = (100% / 3) x 2

Depreciation Expense Rate = 66.67%

2013:

Depreciation Expense = $70,000 x 66.67% = $46,667

2014:

Depreciation Expense = ($70,000 - $46,667) x 66.67% = $15,556

Since the residual value is $10,000 and as per Double Declining Balance Method, the point at which Book Value is equal to the residual value, no depreciation is taken.

Depreciation Expense = (Total Cost - Residual Value) - (Accumulated Depreciation)

Depreciation Expense = ($70,000 - $10,000) - ($46,667)

Depreciation Expense = $13,333

2015:

No Depreciation Expense for year 3, as Book value is already equal to residual value in year 2.

3. PER HOUR DEPRECIATION METHOD:

2013:

Depreciation Cost per hour = (Engine Hours in 2013 / Total Engine Hours) x (Total Cost - Residual Value)

Depreciation Cost per hour = (500 / 1,200) x ($70,000 - $10,000)

Depreciation Cost per hour = $25,000

2014:

Depreciation Cost per hour = (Engine Hours in 2014 / Total Engine Hours) x (Total Cost - Residual Value)

Depreciation Cost per hour = (400 / 1,200) x ($70,000 - $10,000)

Depreciation Cost per hour = $20,000

2015:

Depreciation Cost per hour = (Engine Hours in 2015 / Total Engine Hours) x (Total Cost - Residual Value)

Depreciation Cost per hour = (300 / 1,200) x ($70,000 - $10,000)

Depreciation Cost per hour = $15,000