Hawaiian Specialty Foods purchased equipment for $18,000. Residual value at the end of an estimated four-year service life is expected to be $1,800. The machine operated for 2,300 hours in the first year, and the company expects the machine to operate for a total of 15,000 hours. Calculate depreciation expense for the first year using each of the following depreciation methods: (1) straight-line, (2) double-declining-balance, and (3) activity-based.

Instructions are below.

Explanation:

Giving the following information:

Purchase price = $18,000

Residual value = $1,800

Useful life = 4 years

The machine operated for 2,300 hours in the first year, and the company expects the machine to operate for a total of 15,000 hours.

To calculate the depreciation expense, we need to use the following formulas:

Straight-line:

Annual depreciation = (original cost - salvage value) / estimated life (years)

Annual depreciation = (18,000 - 1,800) / 4 = $4,050

Double-declining balance:

Annual depreciation = 2*[ (book value) / estimated life (years) ]

Annual depreciation = 2 * 4,050 = $8,100

Activity-based:

Annual depreciation = [ (original cost - salvage value) / useful life of production in hours]*hours operated

Annual depreciation = [ (18,000 - 1,800) / 15,000]*2,300

Annual depreciation = $2,484