University Car Wash built a deluxe car was across the street from campus. The ne

Question

University Car Wash built a deluxe car was across the street from campus. The new machines cost $246,000 including installation. The company estimates that the equipment will have a residual value of $27,000. University Car Wash also estimates it will use the machine for six years or about 12,000 total hours.

YEAR      HOURS USED

1)   2,800

2)   1,900

3) 2,000

4)    2,000

5)    1,800

6)    1,500

Prepare a schedule for six-years using straight- line, double-declining balance, and activity-based method.

Explanation / Answer

For straight-line and activity-based method, depreciable amount is Cost - Residual value = $ 246,000 - $ 27,000 = $ 219,000

For straight-line method, annual depreciation expense = 219,000 / 6 = $ 36,500

For activity based method, depreciation expense per hour = Depreciable amount / Total hours = 219,000 / 12,000 = $ 18.25

For double-declining balance, one, residual value is not deducted to arrive at depreciable amount.Two, calculate the rate of depreciation expense under straight line method. Three, double that rate, and that is the rate for the double-declining balance method.

In this case, the straight line rate is 100/6. Therefore the double-declining rate is 100/6 x2 = 33.33% or 1/3

Year Straight-line method Double-declining balance method Activity-based method $ $ $ 1 36,500 82,000 51,100 2 36,500 54,667 34,675 3 36,500 36,444 36,500 4 36,500 24,296 36,500 5 36,500 16,198 32,850 6 36,500 5,395 27,375

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