Hawaiian Specialty Foods purchased equipment for $18,000. Residual value at the end of an estimated four-year service life is expected to be $1,800. The machine operated for 2,300 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, and (3) activity-based.

Instructions are below.

Explanation:

Giving the following information:

Purchase price= $18,000

Residual value= $1,800

Useful life= 4 years

The machine operated for 2,300 hours in the first year, and the company expects the machine to operate for a total of 15,000 hours.

To calculate the depreciation expense, we need to use the following formulas:

Straight-line:

Annual depreciation= (original cost - salvage value)/estimated life (years)

Annual depreciation= (18,000 - 1,800)/4= $4,050

Double-declining balance:

Annual depreciation= 2*[(book value)/estimated life (years)]

Annual depreciation= 2* 4,050= $8,100

Activity-based:

Annual depreciation= [(original cost - salvage value)/useful life of production in hours]*hours operated

Annual depreciation= [(18,000 - 1,800)/15,000]*2,300

Annual depreciation= $2,484

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