Compute depreciation expense for this asset for 2016, 2017, and 2018 using the a. Straight-line method b. Double-declining balance method C. Assume that on January 2, 2018, Lambert revised its estimate of the useful life to 7 years and changed its estimate of the residual value to $ 10,000. What effect would this have on depreciation expense in 2018 for each of the above depreciation methods?
Answer:
The answer is below
Explanation:
(a) Under straight-line method,
We have depreciation expense to be (cost - residual value) ÷ No of years =
=> ($110,000 - $15,000) ÷ 6 years = $15,833 yearly depreciation expense.
Hence, the year depreciation expense of $15,833 is applicable to all the Years 2016, 2017 and 2018.
Therefore, sum of depreciation for all the three years is calculated as
=> $15,833 * 3 years = $47,499.
(b) Under the double-declining method
We have = 2 * SLDP * BV
Where SLDP = Straight - Line Depreciation Percentage
BV = Book value
Hence, SLDP is 100% ÷ 6 years = 16.67%,
Thus, 16.67% * 2 => 33.33%
Therefore, Year 2016, 33.33% * $110,000 = $36,663
For Year 2017, 33.33% * $73,337 ($110,000 - $36,663) = $24,443
For Year 2018, 33.33% * $48,894 ($73,337 - $24,443) = $16,296
Adding all the three Years together => 2016 to 2018, => $77,402
(c) Given that after 2 years, the revised estimated useful life becomes 7 years and the residual value is $10,000, depreciation would be calculated as follows:
Under the straight-line method,
NBV = Net Book Value, at the end of 2017 is: $110,000 - $15,833 * 2 years = $78,334
Depreciation expense is therefore: ($78,334 - $10,000) ÷ 7 years = $9,762 (decrease in 2018 yearly depreciation charge)
Also,
Under the double-declining method,
SLDP is 100% ÷ 7 years = 14.29%, * 2 => 28.57%.
For Year 2018,
28.57% * $48,894 ($73,337 - $24,443) = $13,969 (decrease in 2018 yearly depreciation charge)