Question

Equipment purchased at the beginning of the fiscal year for $260,000 is expected to have a useful life of 5 years, or 25,000 operating hours, and a residual value of $10,000.  Compute the depreciation for the first and second years of use by each of the following methods (worth 35 points) Show work

(a) straight-line

(b) units-of-output (1,200 hours first year; 4,000 hours second year)

(c) double-declining-balance

Answer 1

(a)Straight Line Method:

Depreciation Expense Each year=(Original Cost-Salvage)/Useful Life=(260000-10000)/5=$50,000

Thus,

Depreciation for 1st Year=$50,000

Depreciation for 2nd Year=$50,000

(b)Units-of-output Method

Depreciation Expense per hour=(Original Cost-Salvage)/Total hours in productive life=(260000-10000)/25000=$10 per hour

Depreciation for 1st Year=1200*10=$12,000

Depreciation for 2nd Year=4000*10=$40,000

(c)Double-declining-balance Method:

Depreciation Expense=Book Value*(2*Straight Line Rate)

Depreciation for 1st Year=260000*(2*20%)=$104,000

Depreciation for 2nd Year=(260000-104000)*(2*20%)=$62,400

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