Question

Saul Company purchased a tractor at a cost of $180,000. The tractor has an estimated salvage value of $20,000 and an estimated life of 8 years, or 12,000 hours of operation. The tractor was purchased on January 1, 2019 and was used 2,400 hours in 2019 and 2,200 hours in 2020.

What method of depreciation will produce the maximum depreciation expense in 2019?

Select one:

A. Units-of-production

B. Double-declining-balance

C. Straight-line

D. All methods produce the same expense in 2019

Spencer Company purchased a tractor at a cost of $540,000. The tractor has an estimated salvage value of $60,000 and an estimated life of 8 years, or 12,000 hours of operation. The tractor was purchased on January 1, 2019 and was used 2,400 hours in 2019 and 2,200 hours in 2020.

What amount will Spencer Company report as depreciation expense over the 8-year life of the equipment using straight-line depreciation

Select one:

A. $540,000

B. $480,000

C. $75,000

D. $120,000

Answer 1

What method of depreciation will produce the maximum depreciation expense in 2019?

Units of Production = Depreciable cost * Hours during year/Total hours

= ($180000 - $20000) * 2400 hours/12000 hours = $32000

Double Declining Balance = Tractor cost * DDB Rate

DDB Rate = (1/Life) * 2 * 100

= (1/8 years) * 2 * 100 = 25%

= $180000 * 25% = $45000

Straight Line = ($180000-$200000/8 years = $20000

Double Declining Balance will produce the maximum depreciation

Option (B) is correct

What amount will Spencer Company report as depreciation expense over the 8-year life of the equipment using straight-line depreciation

Depreciation expense over 8years = Cost - Salvage

= $540000 - $60000 = $480000

Option (B) is correct