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