University Car Wash built a deluxe car wash across the street from campus. The n
ID: 2363062 • Letter: U
Question
University Car Wash built a deluxe car wash across the street from campus. The new machines cost $240,000 including installation. The company estimates that the equipment will have a residual value of $30,000. University Car Wash also estimates it will use the machine for six years or about 12,000 total hours. Actual use per year was as follows: Year Hours used 1 2,600 2 2,100 3 2,200 4 1,800 5 1,600 6 1,700 Prepare a depreciation schedule for six years using the straight-line method Prepare a depreciation schedule for six years using the double-declining-balance method Prepare a depreciation schedule for six years using the activity-based method.Explanation / Answer
1. Straight line depreciation = (cost – residual value)/useful life = (240,000 – 30,000)/6 = 35,000 per year
Year
Beginning book value
Depreciation expense
Accumulated Depreciation
Ending book value
1
240,000
35,000
35,000
205,000
2
205,000
35,000
70,000
170,000
3
170,000
35,000
105,000
135,000
4
135,000
35,000
140,000
100,000
5
100,000
35,000
175,000
65,000
6
65,000
35,000
210,000
30,000
2. Double declining balance. Since useful life is 6 years, the straight line rate is 100/6 = 16.67%. Double declining balance rate is twice the straight line rate or 33.33%. The rate is then applied to the beginning book value without taking residual value into consideration. For example, the first year depreciation expense is 240,000*0.3333 = 79,992. Also, depreciation never decreases the book value below residual value.
Year
Beginning Book value
Depreciation Expense
Accumulated Depreciation
Ending Book value
1
240,000
79,992
79,992
160,008
2
160,008
53,331
133,323
106,677
3
106,677
35,555
168,878
71,122
4
71,122
23,705
192,583
47,417
5
47,417
15,804
208,387
31,613
6
31,613
1,613
210,000
30,000
3. Activity based: (cost – residual value)/hours of use = (240,000 – 30,000)/12,000 = $17.50 per hour. To find the depreciation expense for a particular year, you multiply the rate by the number of hours for that year. For example in the first year, it was used 2,600 hours, so the depreciation expense is 2,600*17.50 = 45,500
Year
Beginning book value
Depreciation expense
Accumulated depreciation
Ending book value
1
240,000
45,500
45,500
194,500
2
194,500
36,750
82,250
157,750
3
157,750
38,500
120,750
119,250
4
119,250
31,500
152,250
87,750
5
87,750
28,000
180,250
59,750
6
59,750
29,750
210,000
30,000
Year
Beginning book value
Depreciation expense
Accumulated Depreciation
Ending book value
1
240,000
35,000
35,000
205,000
2
205,000
35,000
70,000
170,000
3
170,000
35,000
105,000
135,000
4
135,000
35,000
140,000
100,000
5
100,000
35,000
175,000
65,000
6
65,000
35,000
210,000
30,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.