Hawaiian Specialty Foods purchased equipment for $16,000. Residual value at the end of an estimated four-year service life is expected to be $1,600. The machine operated for 2,100 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-based. (Do not round your intermediate calculations.)

Answer and Explanation:

The computation of the depreciation expense for the first year is shown below:

1) Straight-line method:

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

= ($16,000 - $1,600) ÷ (4 years)

= ($14,400) ÷ (4 years)  

= $3,600

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

(2) Double-declining balance method:

First we have to calculate the depreciation rate which is given below:

= One ÷ useful life

= 1 ÷ 4

= 25%

Now the rate is double So, 50%

In year 1, the original cost is $16,000, so the depreciation is $8,000 after applying the 50% depreciation rate

(c) Activity based method:

= (Original cost - residual value) ÷ (estimated production)  

= ($16,000 - $1,600) ÷ (15,000 hours)

= ($14,400) ÷ (15,000 hours)  

= $0.96 per hour

Now for the first year, it would be  

= Production hours in first year × depreciation per hour

= 2,100 hours × $0.96

= $2,016

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