Dexter Industries purchased packaging equipment on January 8 for $72,000. The eq

Question

Dexter Industries purchased packaging equipment on January 8 for $72,000. The equipment was expected to have a useful life of three years, or 18,000 operating hours, and a residual value of $4,500. The equipment was used for 7,600 hours during Year 1, 6,000 hours in Year 2, and 4,400 hours in Year 3.

Required:

1. Determine the amount of depreciation expense for the three years ending December 31, by (a) the straight-line method, (b) the units-of-activity method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the three years by each method. (Note: For DECLINING BALANCE ONLY, round the multiplier to five decimal places. Then round the answer for each year to the nearest whole dollar.)

2. What method yields the highest depreciation expense for Year 1?

3. What method yields the most depreciation over the three-year life of the equipment?

Explanation / Answer

1.

a. straight-line method

Depreciation expense in each year = (Original cost - Salvage value) / Useful life

= ($72000 - $4500) / 3 = $22500

b. units-of-activity method

Depreciation rate per unit of activity = (Original cost - Salvage value) / Estimated operating hours

= ($72000 - $4500) / 18000 = $3.75

c. double-declining-balance method:

Straight-line Depreciation rate = (Original cost/ Useful life)/ Original cost

= ($72000/3) / $72000 = 33.33333%

Depreciation rate under double-declining-balance method = 2 x 33.33333% = 66.66667%

2.

double-declining-balance method yields the highest depreciation expense for Year 1

3.

All the three methods yields same depreciation over the three-year life of the equipment.

Year Depreciation
Expense Accumulated
Depreciation Balance 1 $28500 $28500 $43500 2 22500 51000 21000 3 16500 67500 4500

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