OBJ. 2 Monte\'s Coffee Company purchased packaging equipment on January 5, 2014,

Question

OBJ. 2 Monte's Coffee Company purchased packaging equipment on January 5, 2014, for $90,000. The equipment was expected to have a useful life of three years, or 20,000 operating hours, and a residual value of $6,000. The equipment was used for 8,900 hours during PR 9-2A Comparing three depreciation methods 2014, 7,100 hours in 2015, and 4,000 hours in 2016. Instructions 1. Determine the amount of depreciation expense for the years ended December 31, 2014, 2015, and 2016 by (a) the straight-line method, (b) the units-of-output method and (c) the double-declining-balance method. Also determine the total depreciatiorn expense for the three years by each method. The following columnar headings are suggested for recording the depreciation expense amounts: Depreciation Expense Straight- Line Method Units-of- Output Method Double-Declining- Balance Method Year 2. What method yields the highest depreciation expense for 2014: 3. What method yields the most depreciation over the three-year life of the equipment?

Explanation / Answer

CALCULATION OF THE DEPRECIATION AS PER STRAIGHT LINE METHOD Purchase Cost of Equipment $          90,000.00 Less: Salvage Value $            6,000.00 Net Value for Depreciation $          84,000.00 Usefule life of the Assets (in years )                         3.00 Years Depreciation per year = Value for Depreciation / 3 years =              28,000.00 Total Depreciation per year =              28,000.00 CALCULATION OF THE DEPRECIATION AS PER UNIT OF PRODUCTION Purchase Cost of Machine $          90,000.00 Less: Salvage Value $            6,000.00 Net Value for Depreciation $          84,000.00 Expected Operating hours              20,000.00 Hours Depreciation per Hours =                         4.20 Per hours ($ 84,000 / 20,000 Hours) No. of Hours   Rate Per Hours Depreciation Value Depreciation for Year 1 =                      8,900 $                           4.20 $                  37,380 Depreciation for Year 2 =                      7,100 $                           4.20 $                  29,820 Depreciation for Year 3 =                      4,000 $                           4.20 $                  16,800 Total Depreciation Charged =              20,000.00 $                  84,000 CALCULATION OF THE DEPRECIATION AS PER DOUBLE DECLINE METHOD Purchase Cost of Machine $          90,000.00 Useful Life = 3 years Depreciation per year = $          30,000.00 (Purchase price / Useful life) Rate of Depreciation = Rate of Depreciation = (1 / 3 Years ) 0.3333 or 33.33% (Depreication / Purchase price ) Double decline deprection rate = 33.33% * 2 = 66.67% Purchase Value of the Assets $          90,000.00 Depreciation for the year 1 @ 66.67% $          60,000.00 Closing balance for the year1 $          30,000.00 Opening Balance for the year 2 $          30,000.00 Depreciation for the year 2 @ 66.67% $          20,000.00 Closing Balance of the year 2 $          10,000.00 Opening Balance for the year 3 $          10,000.00 Depreciation for the year 3 @ 66.67% $            6,666.67 Closing Balance of the year 3 $            3,333.33 Answer = Depreciation Expesnes Year Straight Line Unit of production Double Decline Balance method 2014              28,000.00 $                      37,380 $            60,000.00 2015              28,000.00 $                      29,820 $            20,000.00 2016              28,000.00 $                      16,800 $              6,666.67              84,000.00                    84,000.00                86,666.67

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