Diamondback Company purchased packaging equipment on January 3, 2002, for $340,0

Question

Diamondback Company purchased packaging equipment on January 3, 2002, for $340,000. The equipment was expected to have a useful life of 3 years, or 18,000 operating hours, and a residual value of $25,000. The equipment was used for 7,500 hours during 2002, 6,000 hours in 2003, and 4,500 hours in 2004.

Determine the amount of depreciation expense for the years ended December 31st 2002, 2003, and 2004, by a)the straight-line method b)the units-of-production method and c)the declining-balance method, using twice the straight-line rate. Also determine the total depreciation expense for the three years by each method. The following columnar headings ae suggested for recording the the deprectiation expense amounts:

Year Straight-Line Method Units-of-Production Method Declining-Balance Method

Explanation / Answer

Year

Straight-Line Method

Units-of-Production Method

Declining-Balance Method

1

$1,05,000

$1,41,667

$226678

2

$1,05,000

$1,13,333

$75551

3

$1,05,000

$85,000

$25182

Total

$315000

$340000

$327411

Straight - Line Method:

Depreciation = (Cost of the Asset – Salvage Value)/Usefull life of the asset

Hence, depreciation p.a = ($340000-25000)/3 = $105000p.a.

Units – of – Production method:

Depreciation = (No.of units consumed during the year / Total units) * Cost of the asset

Hence,depreciation for Yr 1 = 7500/18000*340000 = $141667

                                                Yr 2 = 6000/18000*340000 = $113333

                                                Yr 3 = 4500/18000*340000 = $85000

Declining Balance Method:

Rate of depreciation = twice the straight line rate i.e., 66.67%

Depreciation = Written down value * Rate of depreciation

Hence, Depreciation for Yr 1 = $340000 * 66.67% = $226678

                                                Yr 2 = ($340000-226678) * 66.67% = $75551

                                                Yr 3 = ($340000-226678-75551) * 66.67% = $25182

Year

Straight-Line Method

Units-of-Production Method

Declining-Balance Method

1

$1,05,000

$1,41,667

$226678

2

$1,05,000

$1,13,333

$75551

3

$1,05,000

$85,000

$25182

Total

$315000

$340000

$327411

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