PR 102A Comparing three depreciation methods OBJ 2 v1 a Year

PR 10-2A Comparing three depreciation methods OBJ. 2 v1. a. Year 1: straigh line depreciation, $22,500 Dexter Industries purchased packaging equipment on January 8 for $72,000. The equip- ment was expected to have a useful life of three years, or 18,000 operating hours, and a residual value of $4,500. The equipment was used for 7,600 hours during Year 1, 6,000 hours in Year 2, and 4,400 hours in Year 3 Instructions Excel 1. 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. The following columnar headings are suggested for recording Show Me How the depreciation expense amounts Depreciation Expense Straight- Line Units-of Activity Method Double-Declining- Balance Method Method 2. What method yields the highest depreciation expense for Year 1? 3. What method yields the most depreciation over the three-year life of the equipment?

Solution

Answer 1

Depreciation Expense

Year

Straight line

Units of Activity Method

DDBM

1

$ 22,500.00

$ 28,500.00

48000.00

2

$ 22,500.00

$ 22,500.00

16000.00

3

$ 22,500.00

$ 16,500.00

5333.33

Answer 2)

Double Declining method gives the Highest Depreciation expense in the First year.

Answer 3)

Double Declining method Yields the most Depreciation over the 3 year life of the Equipment.

Calculations

Straight line

A

Cost

$ 72,000.00

B

Residual Value

$    4,500.00

C=A - B

Depreciable base

$ 67,500.00

D

Life [in years]

3

E=C/D

Annual SLM depreciation

$ 22,500.00

Year

Book Value

Depreciation expense

Ending Book Value

Accumulated Depreciation

1

$ 72,000.00

$ 22,500.00

$ 49,500.00

$ 22,500.00

2

$ 49,500.00

$ 22,500.00

$ 27,000.00

$ 45,000.00

3

$ 27,000.00

$ 22,500.00

$    4,500.00

$ 67,500.00

Units of Activity Method

A

Cost

$ 72,000.00

B

Residual Value

$    4,500.00

C=A - B

Depreciable base

$ 67,500.00

D

Usage

18000

E

Depreciation per Hour

3.75

Year

Book Value

Usage

Depreciation expense

Ending Book Value

Accumulated Depreciation

1

$ 72,000.00

7600

$ 28,500.00

$ 43,500.00

$ 28,500.00

2

$ 43,500.00

6000

$ 22,500.00

$ 21,000.00

$ 51,000.00

3

$ 21,000.00

4400

$ 16,500.00

$   4,500.00

$ 67,500.00

Double declining method

A

Cost

$ 72,000.00

B

Residual Value

$    4,500.00

C=A - B

Depreciable base

$ 67,500.00

D

Life [in years]

3

E=C/D

Annual SLM depreciation

$ 22,500.00

F=E/C

SLM Rate

33.33%

G=F x 2

DDB Rate

66.67%

Year

Beginning Book Value

Depreciation rate

Depreciation expense

Ending Book Value

Accumulated Depreciation

1

$ 72,000.00

66.67%

$ 48000.00

$ 24,000.00

$ 48000

2

$ 24,000.00

66.67%

$ 16000.00

$   8,000.00

$ 64000

3

$    8,000.00

66.67%

$ 5333.33

$ 2666.67

$ 69333.33

Depreciation Expense
Year	Straight line	Units of Activity Method	DDBM
1	$ 22,500.00	$ 28,500.00	48000.00
2	$ 22,500.00	$ 22,500.00	16000.00
3	$ 22,500.00	$ 16,500.00	5333.33