Question

Lamory Communications, Inc. purchased a crane at a cost of $80,000. The crane has an estimated residual value of $5,000 and an estimated life of 8 years, or 12,500 hours of operation. The crane was purchased on January 1, 2017 and was used 2,700 hours in 2017 and 2,600 hours in 2018. Based on the information presented above, what method of depreciation will produce the maximum depreciation expense in 2017?

a. straight line

b. double declining balance

c. units of production

d. all methods produce the same expense in 2017

Answer 1

Answer : B, Double declining Balance method

Explanation :

1) Depreciation under Straight line method for 2017

Depreciation = (cost of the asset - salvage value) ÷ life of the asset

= ($80,000 - $5,000) ÷ 8

= $75,000 ÷ 8

= $9,375

2) Depreciation under double declining Balance method for 2017 :

Cost of the asset = $ 80,000

Salvage Value = $ 5,000

The useful life of the asset = 8 years

Depreciation rate = 1/useful life × 100= (1/8) × 100 = 12.5%

Double-declining balance formula = 2 × Cost of the asset × Depreciation rate.

= 2 × $80,000 × 12.5%

= 2 × $10,000

= $20,000

3) Depreciation under units of production method for 2017 :

Depreciation = {(cost of asset - salvage value) ÷ total number of hours } × actual number of hours

= {($80,000 - $5,000) ÷ 12,500} × 2,700

= ($75,000 ÷ 12,500) × 2,700

= $6 × 2,700

= $16,200