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23 August, 00:16

Obj. 2Perdue 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. 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.

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  1. 23 August, 01:54
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    Answer and Explanation:

    a. Straight line method

    Annual depreciation = (Cost price - Scrap value) : Useful life

    = ($270,000 - $9,000) : 3

    = $261,000 : 3

    = $87,000

    Year 1 Year 2 Year 3 Year 4

    Depreciation $65,250 87,000 87,000 $21,750

    Working note

    Depreciation for year 1 = $87,000 * 9 : 12

    = $65,250

    Depreciation for year 2 = $87,000 * 3 : 12

    = $21,750

    b. Units-of-activity method

    Depreciation per hour = (Cost - Scrap value) : Number of operating hours

    = ($270,000 - $9,000) : 18,000

    = $261,000 : 18,000

    = $14.5

    Year 1 Year 2 Year 3 Year 4

    Depreciation $108,750 $79,750 $58,000 $14,500

    Working note

    Depreciation for year 1 = 7,500 * $14.5

    = $108,750

    Depreciation for year 2 = 5,500 * $14.5

    = $79,750

    Depreciation for year 3 = 4,000 * $14.5

    = $58,000

    Depreciation for year 4 = 1,000 * 14.5

    = $14,500

    C. Double declining balance method

    Under the double-declining balance method, depreciation on the decreased asset balance is paid at double straight line depreciation rate.

    Straight line depreciation rate = Annual depreciation : Depreciable base

    = $87,000 : $261,000

    = 33.33%

    So, double declining depreciation rate = 2 * 33.33%

    = 66.67%

    Year 1 Year 2 Year 3 Year 4

    Depreciation $135,000 $90,000 $30,000 $6,000

    Working Note

    Depreciation for year 1 = $270,000 * 66.67% * 9 : 12

    = $135,000

    Depreciation for year 2 = ($270,000 - $135,000) * 66.67%

    = $90,000

    Depreciation for year 3 = ($270,000 - $135,000 - $90,000) * 66.67%

    = $30,000

    Total depreciable assets = $135,000 + $90,000 + $30,000 + $6,000

    = $261,000
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