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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Comparing three depreciation methods

Waylander Coatings Company purchased waterproofing equipment on January 6 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 Year 1, 6,400 hours in Year 2, 4,400 hours in Year 3, and 2,000 hours in Year 4.

Instructions

1.    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 . Also determine the total depreciation expense for the four years by each method. The following columnar headings are suggested for recording the depreciation expense amounts:

Depreciation Expense
Year Straight-Line Method Units-of-Activity Method Double-Declining-Balance Method

2.    What method yields the highest depreciation expense for Year 1?

3.    What method yields the most depreciation over the four-year life of the equipment?

(1) (a)

To determine

Methods of Depreciation: Depreciation refers to the reduction in the monetary value of a fixed asset due to its wear and tear, or obsolescence. It is a method of distributing the cost of the fixed assets over its estimated useful life.

The three methods of depreciation are:

  • Straight-line method: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset.
  • Units-of-activity method: In this method of depreciation, the amount of depreciation is charged based on the unit of production each year.
  • Double-declining balance method (Accelerated method): In this method of depreciation, the diminishing value of the asset is taken into consideration for determining the depreciation for the succeeding years.

To determine: the amount of depreciation for four years ending December 31 by straight-line method.

Explanation

Determinethe amount of depreciation for four years ending December 31 by straight-line method.

Year Depreciation Expense (1)
Year 1 $71,250
Year 2 $71,250
Year 3 $71,250
Year 4 $71,250
Total $285,000

Table (1)

Working note:

Compute depreciable expense under straight line method.

Cost of the equipment= $320,000

Residual value of the equipment = $35,000...

2.

To determine
the method that yields the highest depreciation expense for Year 1.

3.

To determine
the method that yields the most depreciation over the four-year life of the equipment.

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