Answer :
Leaping deer company purchased a tractor at a cost of $440,000. The tractor has an estimated residual value of $40,000 and an estimated life of 8 years, or 12,000 hours of operation. The tractor was purchased on January 1, 2015 and was used 2,400 hours in 2015 and 2,200 hours in 2016.
To find out which method of depreciation will produce maximum depreciation, Depreciation expense for 2018 shall be calculated using all methods.
1) Double-declining balance method: Under this method, depreciation is charged to an accelerated rate to the asset by applying double depreciation instead of a regular depreciation rate. This rate is applied to the value of the depreciable assets.
Depreciable Value of Tractor = Gross Value - Salvage Value = $240,000 - $40,000 = $200,000
The regular rate of depreciation = 100% / Life of Tractor = 100% / 8 Years = 12.5%
Double-declining rate of depreciation = Regular rate X 2 = 12.5 % X 2 = 25%
Depreciation expense for 2018 = Depreciable value of tractor X Dobule-decling rate
= $200,000 X 25%
= $50,000
Depreciation expense as per double-declining method = $50,000
2) Straight-line method: Under this method, the value of the depreciable asset is spread over the useful life of the asset evenly.
Depreciation for 2018 = Useful life of Tractor / Useful life
= $200,000 / 8 Years
= $25,000
Depreciation expense as per straight line method = $25,000
3) Units of production method: Under this method, the depreciable value of assets is depreciated with the level of usage with respect to the overall capacity of assets with respect to usage. Hence, more usage shall lead to higher depreciation.
Total hours available during the life of asset = 12,000
Depreciation to be charged for each hour of usage = Depreciable value / Total hours
= $200,000 / 12,000 Hours
= $16.67 per hour
Depreciation for 2018 = Total hours of usage in 2018 X Depreciation per hour
= 3,800 Hours X $16.67
= $63,346
Depreciation under units of production method = $63,346.
Hence, Highest amount of depreciation is produced under units of production method as tractor has been used for more than one-third of its usage hour capacity. As the other two methods do not take into account the level of usage, their depreciation is just based on time. Hence, Depreciation under the unit production method is highest.
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