DEPKECATION METHODS FINAL EXAM Auto Park, Inc. purchased packaging equipment on

Question

DEPKECATION METHODS FINAL EXAM Auto Park, Inc. purchased packaging equipment on January 1, 2018, for $90,000. The equipment was expected to have a useful life of (3) three years, or 21,000 operating hours and a residual (salvage) value of $6,000. The equipment was used for 8,000 hours during 2018, 7,500 hours in 2019, and 5,500 hours in 2020. REQUIRED: DETERMINE THE AMOUNT OF DEPRECIATION EXPENSE FOR THE YEARS 2018, 2019 AND 2020 BY THE FOLLOWING METHODS: 1. STRAIGHT LINE METHOD. 2. THE DOUBLE DECLINING BALANCE METHOD. DETERMINE THE TOTAL ACCUMULATED DEPRECIATION AT DECEMBER 31, 2019 UNDER THE STRA?GT LINE METHOD. COMPUTE THE BOOK VALUE AT DECEMBER 31, 2018 USING THE STRAIGHT LINE METHOD. 4 5. WHICH METHOD WOULD YOU RECOMMEND IN THE CURRENT ECONOMIC SITUATION? Why?

Explanation / Answer

1. Computation of Depreciation Expense for 2018, 2019 & 2020

SLM Method = [Cost of Equipment - salvage Value] / Useful Life = [$90000 - $6000]/3 = $28000

For 2018 = $28000

For 2019 = $28000

For 2020 = $28000

2. Under Double Declining Balance Method

For 2018 = 2 * Straight Line Depreciation Rate * Beginning Year Value

For 2018 = 2 * 33.33% * $90000 = $60000

For 2019 = 2 * Straight Line Depreciation Rate * Beginning Value of Asset in 2019

For 2019 = 2 * 33.33% * $30000 = $20000

For 2020 = Beginning Value of Asset in 2020 - Salvage Value

For 2020 = $10000 - $6000 = $4000

3. Accumulated Depreciation at December 31 2019 under SLM

Accumulated Depreciation = $28000 * 2

Accumulated Depreciation = $56000

4. Book Value at Dec 31 2018

Book Value at Dec 31 2018 = Cost of Equipment - Depreciation for 2018

Book Value at Dec 31 2018 = $90000 - $28000

Book Value at Dec 31 2018 = $62000

5. The Company should Calculate depreciation based on usage rather than useful life of asset as it gives clear picture of the usage of equipment

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