Equipment purchased at the beginning of the fiscal year for

Equipment purchased at the beginning of the fiscal year for $840,000 is expected to have a useful life of 10 years, or 400,000 operating hours, and a residual value of $40,000. Compute the depreciation for the first and second years of use by each of the following methods: a) b) c) straight-line units-of-production (10,000 hours first year; 15,000 hours second year) declining-balance at twice the straight-line rate (Round the answer to the nearest dollar.)

Solution

a) Year 1 Year 2 Depreciation under straight line $           80,000 $           80,000 Working: Depreciation under straight line = (Cost - Salvage Value)/Useful Life = (840000-40000)/10 = $           80,000 Depreciation under straight line is same for all years. b. Year 1 Year 2 Depreciation under units-of-production $           20,000 $           30,000 Working: Depreciation rate = (Cost - Salvage Value)/Total operating hours = (840000-40000)/400000 = $         2.00 per hour Deprceiation Expense for: Operating hours x Depreciation rate = Deprciation per hour Year 1        10,000 x $       2.00 = $       20,000 Year 2        15,000 x $       2.00 = $       30,000 c) Year 1 Year 2 Depreciation under declining-balance $       1,68,000 $       1,34,400 Working: Straight Line rate = 1/10 = 10% Double declining rate = 2*10% = 20% Depreciation Schedule: Year Beginning Balance Depreciation rate Depreciation Expense Ending Book Value a b c=a*b d=a-c 1         8,40,000 20%           1,68,000 6,72,000 2         6,72,000 20%           1,34,400 5,37,600