Obj. 2Perdue Company purchased equipment on April 1 for $270,000. The equipment was expected to have a useful life of three years or 18,000 operating hours, and a residual value of $9,000. The equipment was used for 7,500 hours during Year 1, 5,500 hours in Year 2, 4,000 hours in Year 3, and 1,000 hours in Year 4. Instructions Determine the amount of depreciation expense for the years ended December 31, Year 1, Year 2, Year 3, and Year 4, by (A) the straight-line method, (B) the units-of-activity method, and (C) the double-declining-balance method.

Answer and Explanation:

a. Straight line method

Annual depreciation = (Cost price - Scrap value) ÷ Useful life

= ($270,000 - $9,000) ÷ 3

= $261,000 ÷ 3

= $87,000

                                         Year 1     Year 2    Year 3      Year 4

Depreciation                 $65,25087,00087,000  $21,750

Working note

Depreciation for year 1 = $87,000 × 9 ÷ 12

= $65,250

Depreciation for year 2 = $87,000 × 3 ÷ 12

= $21,750

b. Units-of-activity method

Depreciation per hour = (Cost - Scrap value) ÷ Number of operating hours

= ($270,000 - $9,000) ÷ 18,000

= $261,000 ÷ 18,000

= $14.5

                             Year 1        Year 2      Year 3        Year 4

Depreciation       $108,750  $79,750  $58,000      $14,500

Working note

Depreciation for year 1 = 7,500 × $14.5

= $108,750

Depreciation for year 2 = 5,500 × $14.5

= $79,750

Depreciation for year 3 = 4,000 × $14.5

= $58,000

Depreciation for year 4 = 1,000 × 14.5

= $14,500

C. Double declining balance method

Under the double-declining balance method, depreciation on the decreased asset balance is paid at double straight line depreciation rate.

Straight line depreciation rate = Annual depreciation ÷ Depreciable base

= $87,000 ÷ $261,000

= 33.33%

So, double declining depreciation rate = 2 × 33.33%

= 66.67%

                                Year 1            Year 2      Year 3     Year 4

Depreciation  $135,000    $90,000     $30,000 $6,000

Working Note

Depreciation for year 1 = $270,000 × 66.67% × 9 ÷ 12

= $135,000

Depreciation for year 2 = ($270,000 - $135,000) × 66.67%

= $90,000

Depreciation for year 3 = ($270,000 - $135,000 - $90,000) × 66.67%

= $30,000

Total depreciable assets = $135,000 + $90,000 + $30,000 + $6,000

= $261,000