Computing depreciation—three methods Crispy Fried Chicken bought equipment on January 2, 2018, for \(33,000. The equipment was expected to remain in service for four years and to operate for 6,750 hours. At the end of the equipment’s useful life, Crispy’s estimates that its residual value will be \)6,000. The equipment operated for 675 hours the first year, 2,025 hours the second year, 2,700 hours the third year, and 1,350 hours the fourth year.

Requirements

1. Prepare a schedule of depreciation expense, accumulated depreciation, and book value per year for the equipment under the three depreciation methods: straight-line, unit’s of-production, and double-declining-balance. Show your computations. Note: Three depreciation schedules must be prepared.

2. Which method tracks the wear and tear on the equipment most closely?

The expenses charged in the income statement to report the decline in the value of the fixed assets acquired by the company are known as depreciation expenses.

Straight-line method:

Working note:

Calculation of depreciation expenses

$\begin{array}{c}Depreciationexpenses=\frac{Cost-Salvagevalue}{Usefullifeinyears}\\ =\frac{\$33,000-\$6,000}{4}\\ =\$6,750\end{array}$

Working note:

Calculation of depreciation expenses per hour:

$\begin{array}{c}Depreciationexpenses=\frac{Cost-Salvagevalue}{Usefullifeinhours}\\ =\frac{\$33,000-\$6,000}{6,750}\\ =\$4perhour\end{array}$

Calculation of depreciation expenses per year:

Working note:

Calculation of rate of depreciation:

$\begin{array}{c}Depreciationrate=\frac{1}{Usefullife}\times 100\\ =\frac{1}{4}\times 100\\ =25\%\end{array}$

Calculation of depreciation expenses:

The most appropriate method of allocating depreciation expense is the units of production method because under this method the depreciation is allocated on the basis of the number of hours for which the machine is used. Therefore, it will provide more relevant depreciation expenses.