4.6: Summary
An asset costs $27,000, has a residual value of $900, and has a three-year or 8,700-hour useful life. The company used the asset as follows: 2,200 hours in 2012; 2,500 hours in 2013; 2,700 hours in 2014; and 2,400 hours in 2015.
| Method | Process | Comments | Example (below) | |||||||||||||||||||||||||
| Straight-Line |
\(\ \frac{\text{
Cost - Residual value }}{\text{Useful life in years }}\) |
Asset is fully depreciated once it has been used the number of years in its useful life. | \(\ \frac{27,000 - 900}{3}\) | = 8,700 per year | ||||||||||||||||||||||||
| Units of Production |
\(\ \frac{\text{
Cost - Residual value }}{\text{Useful life in hours }}\) |
Multiply hourly rate times number of hours used in the year. Asset is fully depreciated once it has been used the number of hours in its useful life. | \(\ \frac{27,000 - 600}{8,700}\) | = $3 per hour | ||||||||||||||||||||||||
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2,100 in year 1 ($3 x 2200 hours) 2,300 in year 2 ($3 x 2500 hours) 2,600 in year 3 ($3 x 2700 hours) 1,700 in year 4 ($3 x 2400 hours) |
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| Declining Balance (“Twice the straight-line rate” just means to divide 2 by the number of years) | Multiply the book value at the beginning of each year by 2/ number of years to determine the amount for the adjusting entry. |
Do not subtract out residual value at the beginning (which you did for straight-line.)
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