Packaging Equipment

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compare three depreciation methods?

Air Pack Company purchased packaging equipment on January 3, 2006 for $90,000. The equipment was expected to have a useful life of three years, or 21,000 operating hours, and a residual value of $6,000. The equipment was used for 8,000 hours during 2006, 7,500 hours in 2007, and 5,500 hours in 2008.

Instructions:

Determine the amount of depreciation expense for the years ended December 31, 2006, 2007 and 2008, by (a) the straight-line method, (b) the units-of-production and (c) the double- declining –balance method. Also determine the total depreciation expenses for the three years by each method.

Straight Line
2006 $28,000 (90,000 - 6,000) / 3
2007 $28,000
2008 $28,000
Total $84,000

Units of Prod
2006 $32,000 ((90,000-6000) / 21000 x8000)
2007 $30,000
2008 $22,000
Total $84,000

DDB
2006 $60,000 (90000 / 3 X 2)
2007 $20,000 (90000 - 60000) / 3 X 2
2008 $4,000 *
Total $84,000

* Under DDB, the 2008 depreciation calculates as $6,666.67, but that would take the net book value below the $6,000 residual value, so you limit the depreciation in that year to the figure needed to take NBV down to the $6,000 residual value

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