   Chapter 10, Problem 10.3APR

Chapter
Section
Textbook Problem

Depreciation by three methods; partial yearsPerdue 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.InstructionsDetermine 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.

(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 1:

Cost of the equipment= $270,000 Residual value of the equipment =$9,000

Estimated Useful life of the equipment = 3 years

Number of months equipment used =9 months (April 1-December 31)

Depreciable Expense=[CostResidual valueEstimatedusefullife×Numberofmonthsused12]$270,000 –$9,0003years×912=$261,0003×912=$65,250

Year 2:

Cost of the equipment= $270,000 Residual value of the equipment =$9,000

Estimated Useful life of the equipment = 3 years

Number of months equipment used =12 months (January 1-Deccember 31)

Depreciable Expense=[CostResidual valueEstimatedusefullife×Numberofmonthsused12]$270,000 –$9,0003years×1212=$261,0003×1212=$87

(b)

To determine
the amount of depreciation for four years ending December 31 by units-of-activity method.

(c)

To determine
the amount of depreciation for four years ending December 31 by double-declining-balance method.

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