Mammoth company purchased packaging equipment on January 3, 2008 for $67,500. Th

Question

Mammoth company purchased packaging equipment on January 3, 2008 for $67,500. The equipment was expected to have a useful life of three years, or 25,000 operating hours, and a residual value of $4,500. The equipment was used for 12,000 hours during 2008, 9000 hours during 2009 and 4000 in 2010.

1) Determine the amount of depreciation for the years ending December 31, 2008, 2009, and 2010 by
a) straight line method
b) units-of-production method
c) double declining balance method.
2) Also determine the total deprecation expense for the three years by
a) straight line method
b) units-of-production method
c) double declining balance method.

Explanation / Answer

1. a) Straight-line Method Annual Depreciation = Cost-Residual value/Useful Life                                  =$67,500-$4,500/3 Years                                  =63,000/3=$21,000 Expected Years of useful Life                    Straight Line Percentage 3 Years                                                   33.33% (100%/3 b) Units-of production method Depreciation per unit = Cost- Residual Value/Total units of production For 2008 Year Depreciation= 67,500-4,500/12,000                                               =63,000/12,000                                                =5.25 For 2009 Year Depreciation = 67,500-4,500/9,000                                              =63,000/9,000                                               =7.00 For 2010 Year Depreciation= 67,500-4,500/4,000                                              =63,000/4,000                                               =15.75 C) Double declining balance method The double -declining balance method is applied in three steps. Step 1. Determine the straight-line percentage using the expected useful life. Step 2. Determine the double-declining balance rate by multiplying the straight-line rate from step 1 by two Step 3. Compute the depreciation expense by multiplying the double-declininig balance rate from step 2 times the book value of the asset. For the first year , the depreciation is $44,995 as shown below. Step 1. Straight-Line percentage   = 33.33% Step 2. Double-declining balance rate=66.66% (33.33 x 2) Step 3. Depreciation expense = $44,995 ($67,500 x 66.66%) 2 Total Depreciation expenses for three years Year      Straight- Line Method     Units of Production Method     Double-declining Method 1                $21,000                            $63,000(5.25x12,000)         $44,995 (67,500x66.66%) 2.                $21,000                           $63,000(7.00x9,000)           $15,001 (67,500-44995*66.66% 3.                $21,000                           $63,000(15.75x4,000)          $5,002 (22,505-15,001*66.66% Total:           $63,000                          $189,000                             $64,998

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