Layton Company purchased tool sharpening equipment on October 1 for $108,000

Layton Company purchased tool sharpening equipment on October 1 for $108,000.The equipment was expected to havea useful life ofthree years, or 12,000 operating hours, and a residual value of $7,200. The equipment was used for 1,350 hours during Year 1, 4,200 hours in Year 2, 3,650 hours in Year 3, and 2,800 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: [($108,000 – $7,200) ÷ 3] × 3 ÷ 12....................................... $ 8,400

Year 2: [($108,000 – $7,200) ÷ 3]................................................... 33,600

Year 3: [($108,000 – $7,200) ÷ 3]................................................... 33,600

Year 4: [($108,000 – $7,200) ÷ 3] × 9 ÷ 12....................................... 25,200

b. Units-of-activity method:

Activity rate = ($108,000 – $7,200) ÷ 12,000 hours = $8.40 per hour

Year 1: 1,350 hours × $8.40......................................................... $11,340

Year 2: 4,200 hours × $8.40......................................................... 35,280

Year 3: 3,650 hours × $8.40......................................................... 30,660

Year 4: 2,800 hours × $8.40......................................................... 23,520

c. Double-declining-balance method:

Year 1: $108,000 × 2 ÷ 3 × 3 ÷ 12................................................... $18,000

Year 2: ($108,000 – $18,000) × 2 ÷ 3............................................. 60,000

Year 3: ($108,000 – $18,000 – $60,000) × 2 ÷ 3................................. 20,000

Year 4: ($108,000 – $18,000 – $60,000 – $20,000 – $7,200)............... 2,800

Note:  Book value should not be reduced below $7,200, the residual value.