Question

Comparing Three Depreciation Methods

Waylander Coatings Company purchased waterproofing equipment on January 6, 2013, for $320,000. The equipment was expected to have a useful life of four years, or 20,000 operating hours, and a residual value of $35,000. The equipment was used for 7,200 hours during 2013, 6,400 hours in 2014, 4,400 hours in 2015, and 2,000 hours in 2016.

Required:

1. Determine the amount of depreciation expense for the years ended December 31, 2013, 2014, 2015, and 2016, by (a) the straight-line method, (b) units-of-output method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the four years by each method. Do not round your intermediate calculations.

Depreciation Expense
Year Straight-Line Method Units-of-Output Method Double-Declining-Balance Method
2013 $ $ $
2014 $ $ $
2015 $ $ $
2016 $ $ $
Total $ $ $
2. What method yields the highest depreciation expense for 2013?
SelectStraight-line methodUnits-of-output methodDouble-declining-balance methodAll three depreciation methodsItem 16

3. What method yields the most depreciation over the four-year life of the equipment?
SelectStraight-line methodUnits-of-output methodDouble-declining-balance methodAll three depreciation methodsItem 17

Answer 1

Answer:

1.a

2013 Depreciation

Straight line method $71,250

Units-of-output $102,600

Double declining balance $160,000

2014 Depreciation

Straight line method $71,250

Units-of-output $91,200

Double declining balance $80,000

2015 Depreciation

Straight line method $71,250

Units-of-output $62,700

Double declining balance $40,000

2016 Depreciation

Straight line method $71,250

Units-of-output $28,500

Double declining balance $20,000

1.B Total Depreciation in 4 years

Straight line method $285,000

Units-of-output $285,000

Double declining balance $300,000

2. Double declining balance yields the highest depreciation expense for 2013

3. Double declining balance yields the highest depreciation expense over the FOUR-year life of an equipment

Explanation:

1.A In computing straight line method, the formula would be:

(cost of equipment - salvage value) / life of equipment

2013

(320,000 - 35,000) / 4 years = 71,250

2014

(320,000 - 35,000) / 4 years = 71,250

2015

(320,000 - 35,000) / 4 years = 71,250

2016

(320,000 - 35,000) / 4 years = 71,250

TOTAL DEPRECIATION IN 4 YEAR LIFE OF EQUIPMENT = $285,000 ($71,250 + $71,250 + $71,250 + $71,250)

UNITS-OF-OUTPUT METHOD

Formula: (Cost of equipment - salvage value) / total operating hours of equipment x operating hours used for the year

2013

($320,000 - 35,000) / 20,000 x 7,200

($285,000 / 20,000) x 7,200

14.25 per hour x 7,200 =$102,600

2014

($320,000 - 35,000) / 20,000 x 6,400

($285,000 / 20,000) x 6,400

14.25 per hour x 6,400 =$91,200

2015

$320,000 - 35,000) / 20,000 x 4,400

($285,000 / 20,000) x 4,400

14.25 per hour x 4,400 =$62,700

2016

($320,000 - 35,000) / 20,000 x 2,000

($285,000 / 20,000) x 2,000

14.25 per hour x 2,000 =$28,500

TOTAL DEPRECIATION IN 3 YEAR LIFE OF EQUIPMENT = $285,000 ($102,600 + $91,200 + $62,700 + $28,500)

DOUBLE DECLINING BALANCE

Formula: 100%/life of equipment x 2

*residual value will not be considered in this method of computation of depreciation expense.

2013

100% / 4 years x 2 = 50%

$320,000 x 50% = $160,000

2014

100% / 4 years x 2 = 50%

$320,000 - $160,000 =$160,000

$160,000 x 50% = $80,000

2015

100% / 4 years x 2 = 50%

$320,000 - ($160,000 + $80,000) = $80,000

$80,000 x 50% = $40,000

2016

100% / 4 years x 2 = 50%

$320,000 - ($160,000 + $80,000 + $40,000) = $40,000

$40,000 x 50% = $20,000

TOTAL DEPRECIATION IN 3 YEAR LIFE OF EQUIPMENT = $300,000 ($160,000 + $80,000 + $40,000 + $20,000)

2. Double declining method yields the highest depreciation expense in 2013 in the amount of $160,000 as computed above.

3. The method that yields most depreciation over the four-year life of an equipment is the DOUBLE DECLINING METHOD in a total amount of $300,000.