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

The brand s freezer will have a lower lifetime cost because he will pay less interest on it in the long run. however, we don't know how much each brand of freezer costs, so we can't say exactly how much lower his cost will be.