Question

Use the following information to answer the next three questions.

Tulsa Corporation purchased equipment at a cost of $360,000 at the beginning of Year 1. The equipment has an estimated life of 4 years and an estimated salvage value of $30,000. The equipment, which is expected to last 20,000 hours, was operated 6,000 hours in Year 1. The equipment is operated 8,000 hours in Year 2.

11. Assuming double-declining-balance depreciation is used, the book value at the end of year 2 is closest to

	$90,000
	$135,000

	$180,000
	$215,000

12. Assuming straight-line depreciation is used the ending book value at the end of year 2 would be closest to

	$180,000
	$195,000

	$210,000
	$225,000

13 Assuming units-of-production depreciation is used the ending book value at the end of year 2 would be closest to

	$101,000
	$116,000

	$123,000
	$129,000

Answer 1

11) Double declining balance method

Depreciation rate = (1 / Useful life) * 200%

Depreciation rate = (1 / 4) *200% = 50%

Depreciation in year 1 = $360,000 * 50% = $180,000

Book value at end of year 1 = $360,000 - $180,000 = $180,000

Depreciation in year 2 = $180,000 * 50% = $90,000

Book value at end of year 2 = $90,000

Option '1' is correct

12) Straight-line depreciation method

Depreciation expense under SLM method = (cost - residual value) / useful life

= ($360,000 - $30,000) / 4

= $82,500

Book value at end of year 2 = $360,000 - ($82,500 * 2) = $195,000

Book value at end of year 2 = $195,000

Option '2' is correct

13) Units-of production method

Depreciation expense per hour of production = (cost - salvage) / estimated hours of production

= ($360,000 - $30,000) / 20,000

= $330,000 / 20,000 = $16.50 per hour

Depreciation expense in year 1 = $16.50 * 6,000 = $99,000

Depreciation expense in year 2 = 16.50 * 8,000 = $132,000

Book value at end of year 2 = $360,000 - $99,000 - $132,000 = $129,000

Book value at end of year 2 = $129,000

Option '4' is correct