PR 10-2B Compare three depreciation methods

Plum Coatings Company purchased waterproofing equipment on January 2, 2011, for $450,000. The equipment was expected to have a useful life of four years, or 10,000 operating hours, and a residual value of $50,000. The equipment was used for 3,000 hours during 2011, 4,000 hours in 2012, 2,500 hours in 2013, and 500 hours in 2014.
Instructions

1. Determine the amount of depreciation expense for the years ended December 31, 2011, 2012, 2013, and 2014, by (a) the straight-line method, (b) the units-of-production method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the four years by each method. The following columnar headings are suggested for recording the depreciation expense amounts:


Depreciation Expense
Year
StraightLine Method
Units-ofProduction Method
Double-DecliningBalance Method

2. What method yields the highest depreciation expense for 2011?
3. What method yields the most depreciation over the four-year life of the equipment?

Answer:

1.  
Depreciation Expense   a. Straight- b. Units-of- c. Double-   Line Production Declining-Balance  Year Method Method Method   2011 $100,000 $120,000 $225,000  2012 100,000 160,000 112,500  2013 100,000 100,000 56,250  2014  100000  20,000  6,250*  Total $400,000 $400,000 $400,000   


Calculations:  
Straight-line method:  
($450,000 – $50,000)/4 = $100,000 each year  

Units-of-production method:  
($450,000 – $50,000)/10,000 hours = $40 per hour  
2011: 3,000 hours @ $40 = $120,000  
2012: 4,000 hours @ $40 = $160,000  
2013: 2,500 hours @ $40 = $100,000  
2014: 500 hours @ $40 = $20,000  

Double-declining-balance method:  
2011: $450,000 × 50% = $225,000  
2012: ($450,000 – $225,000) × 50% = $112,500  
2013: ($450,000 – $225,000 – $112,500) × 50% = $56,250  
2014: ($450,000 – $225,000 – $112,500 – $56,250 – $50,000*) = $6,250  
*Book value should not be reduced below the residual value of $50,000.

2.  The double-declining-balance method yields the most depreciation expense in 2011 of $225,000.

3.  All three depreciation methods yield the same total depreciation over the four-year life of the equipment of $400,000, which is the cost of the equipment of $450,000 less the residual value of $50,000.

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