08.2 PR 10-2A Compare three depreciation methods Va. 2010: straight Breyer Compa

Question

08.2 PR 10-2A Compare three depreciation methods Va. 2010: straight Breyer Company purchased packaging equipment on January 3, 2010, for $101,250. The line depreciation, equipment was expected to have a useful life of three years, or 25,000 operating hours and a residual value of $7,500. The equipment was used for 9,500 hours during 2010, 531,250 8,400 hours in 2011, and 7,100 hours in 2012. Instructions 1. Determine the amount of depreciation expense for the years ended December 31, 2010, 2011, and 2012, by (a) the straight-line method, (b) the units-of-production method and ( the double-declining-balance method. Also determine the total depreciation 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- Production Method Double-Declining Balance Method Year 2. What method yields the highest depreciation expense for 2010? 3. What method yields the most depreciation over the three-year life of the equipment?

Explanation / Answer

1) a) Depreciation under the straight line method: Annual depreciation = (101250-7500)/3 = $         31,250 Depreciation expense for 2010, 2011 and 2012 = $31,250 Total depreciation for 2010, 2011 and 2012 = 31250*3 = $         93,750 b) Depreciation under units of production method: Depreciation rate = (101250-7500)/25000 = $3.75 per hour Depreciation for 2010 = 9500*3.75 = $         35,625 Depreciation for 2011 = 8400*3.75 = $         31,500 Depreciation for 2012 = 7100*3.75 = $         26,625 Total depreciation $         93,750 c) Double declining balance method: Rate = (100/3)*2 = 66.67% Depreciation for 2010 = 101250*66.67% = $         67,503 Depreciation for 2011 = (101250-67503)*66.67% = $         22,499 Depreciation for 2012 = (101250-67503-22499-7500) = $           3,748 Total depreciation $         93,750 Depreciation Expense Straight line Units of DDB method production method Year method 2010 $         31,250 $         35,625 $        67,503 2011 $         31,250 $         31,500 $        22,499 2012 $         31,250 $         26,625 $          3,748 Total depreciation $         93,750 $         93,750 $        93,750 2) The DDB method yields the highest depreciation -- $67,503 3) All methods yield the same total depreciation over the three year period.

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