Perdue 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:
a. Straight-line method:
Year 1: ($270,000 – $9,000) ÷ 3 × 9 ÷ 12............................................. $65,250
Year 2: ($270,000 – $9,000) ÷ 3......................................................... 87,000
Year 3: ($270,000 – $9,000) ÷ 3......................................................... 87,000
Year 4: ($270,000 – $9,000) ÷ 3 × 3 ÷ 12............................................. 21,750
b. Units-of-activity method:
Activity rate = ($270,000 – $9,000) ÷ 18,000 hours = $14.50 per hour
Year 1: 7,500 hours × $14.50............................................................ $108,750
Year 2: 5,500 hours × $14.50............................................................ 79,750
Year 3: 4,000 hours × $14.50............................................................ 58,000
Year 4: 1,000 hours × $14.50............................................................ 14,500
c. Double-declining-balance method:
Year 1: $270,000 × 2 ÷ 3 × 9 ÷ 12...................................................... $135,000
Year 2: ($270,000 – $135,000) × 2 ÷ 3................................................ 90,000
Year 3: ($270,000 – $135,000 – $90,000) × 2 ÷ 3................................. 30,000
Year 4: ($270,000 – $135,000 – $90,000 – $30,000 – $9,000).................. 6,000
Note: Book value should not be reduced below $9,000, the residual value.
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