Hawaiian Specialty Foods purchased equipment for $23,000. Residual value at the end of an estimated four-year service life is expected to be $2,300. The machine operated for 2,400 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.
3) activity-based.

a. $5,175

b. $11,500

c. $3,312

Explanation:

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

a) Straight-line method:

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

= ($23,000 - $2,300) ÷ (4 years)

= ($20,700) ÷ (4 years)  

= $5,175

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

(b) 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 $23,000, so the depreciation is $11,500 after applying the 50% depreciation rate

(c) Units-of-production method:

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

= ($23,000 - $2,300) ÷ (15,000 hours)

= ($20,700) ÷ (15,000 hours)  

= $1.38 per hour

Now for the first year, it would be  

= Production hours in first year × depreciation per hour

= 2,400 hours × $1.38

= $3,312

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