Hawaiian Specialty Foods purchased equipment for $24,000. Residual value at the end of an estimated four-year service life is expected to be $2,400. The machine operated for 2,500 hours in the first year, and the company expects the machine to operate for a total of 15,000 hours. Calculate depreciation expense for the first year using each of the following depreciation methods: (1) straight-line, (2) double-declining-balance, and (3) activity-base

Answer and Explanation:

The computation of the depreciation expense is shown below:

1. Straight-line method:

= (Original cost - residual value) ÷ (useful life)

= ($24,000 - $2,400) ÷ (4 years)

= ($21,600) ÷ (4 years)  

= $5,400

In this method, the depreciation is same for all the remaining useful life

2. Double-declining balance method:

First we have to find the depreciation rate which is shown below:

= One ÷ useful life

= 1 ÷ 4

= 25%

Now the rate is double So, 50%

In year 1, the original cost is 24,000, so the depreciation is $12,000 after applying the 50% depreciation rate

(c) Units-of-production method: or activity base method

First we have to find out the depreciation per hour which is shown below:

= (Original cost - residual value) ÷ (estimated operating hours)  

= ($24,000 - $2,400) ÷ (15,000 hours)

= ($21,600) ÷ (15,000 hours)  

= $1.44 per hour

Now for the first year, it would be  

= Operating hours in first year × depreciation per hour

= 2,500 hours  × $1.44

= $3,600