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13 December, 19:42

Perdue Company purchased equipment on April 1 for $38,880. The equipment was expected to have a useful life of three years, or 5,400 operating hours, and a residual value of $1,080. The equipment was used for 1,000 hours during Year 1, 1,900 hours in Year 2, 1,600 hours in Year 3, and 900 hours in Year 4.

Required:

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) units-of-activity method, and (c) the double-declining-balance method.

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  1. 13 December, 20:08
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    See explanation section.

    Explanation:

    Requirement 1

    We know,

    Depreciation expense under the straight-line method = (Cost price - residual value) : useful life

    The depreciation expense under the straight-line method remains same in every year.

    December 31, Year 1 - depreciation expense = ($38,880 - $1,080) : 3 years.

    Depreciation expense = ($37,800 : 3)

    Depreciation expense = $12,600

    Depreciation expense for year 1 = $12,600 * 9 : 12

    Depreciation expense for year 1 = $9,450

    Requirement 2

    The depreciation expense under the straight-line method remains the same every year.

    Year 2 depreciation expense = ($38,880 - $1,080) : 3 years = $12,600

    Year 3 depreciation expense = ($38,880 - $1,080) : 3 years = $12,600

    Year 4 depreciation expense = ($38,880 - $1,080) : 3 years = $12,600

    The equipment will be dissolved after 4 year with a residual value of $1,080.

    Requirement 3

    The depreciation expense under units-of-activity method = [ (Cost price - residual value) : Total operating hours] * usage during the period.

    Given,

    Cost price = $38,880

    residual value = $1,080

    Total operating hours = 5,400

    Putting the values into the formula, we can get

    Depreciation expense rate = ($38,880 - $1,080) : 5,400

    Depreciation expense rate = $37,800 : 5,400

    Depreciation expense rate = $7 per hour.

    Depreciation expense for year 1 = $7 per hour * 1,000

    Depreciation expense for year 1 = $7,000

    Requirement 4

    We get from requirement 3

    Depreciation expense rate = $7 per hour.

    Year 2 Depreciation expense = $7 per hour.

    Depreciation expense for year 2 = $7 per hour * 1,900 hour.

    Depreciation expense for year 2 = $13,300 hour.

    Year 3 Depreciation expense = $7 per hour.

    Depreciation expense year 3 = $7 per hour * 1,600 hour.

    Depreciation expense year 3 = $11,200 hour.

    Year 4 Depreciation expense = $7 per hour.

    Depreciation expense year 4 = $7 per hour * 900 hour.

    Depreciation expense year 4 = $6,300 hour.

    Requirement 5

    Depreciation rate under the double-declining-balance method = (100% : useful life) : 2

    Depreciation rate = (100% : 3 years) * 2

    Depreciation rate = 66.67%

    Depreciation expense for year 1 = cost price * depreciation rate

    Given,

    cost price = $38,880

    depreciation rate = 66.67%

    Putting the values into the formula, we can get

    Depreciation expense for year 1 = cost price * depreciation rate

    Depreciation expense for year 1 = $38,880 * 66.67%

    Depreciation expense for year 1 = $25,921

    Requirement 6

    In double-declining-balance method, depreciation expense is decreasing.

    Book value of year 1 after depreciation = Cost price - year 1 depreciation expense = $38,880 - $25,921 = $12,959

    Depreciation expense for year 2 = Book value of year 1 * depreciation rate.

    Depreciation expense for year 2 = ($12,959 * 66.67%) = $8,640

    Book value of year 2 after depreciation = Book value of year 1 - Depreciation expense for year 2 = $12,959 - $8,640 = $4,319

    Depreciation expense for year 3 = Book value of year 2 * depreciation rate.

    Depreciation expense for year 3 = $4,319 * 66.67% = $2,879.50

    Book value of year 3 after depreciation = Book value of year 2 - Depreciation expense for year 3 = $4,319 - $2,879.50 = $1,439.5

    Depreciation expense for year 4 = Book value of year 3 * depreciation rate.

    Depreciation expense for year 4 = $1,439.5 * 66.67% = $960
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