Question

Equipment purchased at the beginning of the fiscal year for $360,000 is expected to have a useful life of five years, or 14,000 operating hours, and a residual value of $10,000. Compute the depreciation for the first and second years of use by each of the following methods. a. Straight-line: First year $ Second year $ b. Units-of-activity (1,200 hours first year; 2,250 hours second year): First year $ Second year $ c. Double-declining-balance: First year $ Second year $

Answer 1

Answer and Explanation:

The computations is shown below;

a) Straight-line method:

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

= ($360,000 - $10,000) ÷ (5 years)

= ($350,000) ÷ (5 years)

= $70,000

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

Therefore for first year and second year the same depreciation i.e $70,000 is to be charged separately

(b) Units-of-production method:

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

= ($360,000 - $10,000) ÷ (14,000 hours)

= ($350,000) ÷ (14,000 hours )

= $25 per hour

For the first year

= Operating hours in first year × depreciation per hour

= 1,200 hours × $25

= $30,000

And for the second year, it would be

= Operating hours in second year × depreciation per hour

= 2.250 hours × $25

= $56,250

(c) Double-declining balance method:

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

= One ÷ useful life

= 1 ÷ 5

= 20%

Now the rate is double So, 40%

In year 1, the original cost is $360,000, so the depreciation is $144,000 after applying the 40% depreciation rate

And, in year 2, the ($360,000 - $144,000) × 40% = $86,400