On january 1, 2016, knapp corporation acquired machinery at a cost of $1,250,000. knapp adopted the double-declining balance met
hod of depreciation for this machinery and had been recording depreciation over an estimated useful life of ten years, with no residual value. at the beginning of 2019, a decision was made to change to the straight-line method of depreciation for the machinery. the depreciation expense for 2019 would be
Cost on January 1 2016 = $1,250,000 Life = 10 years
Therefore, Double-declining depreciation rate = 2*(1,250,000/10)/1,250,000 = 2*0.1 = 2*10% = 20% Book value at end of 2016 = 1,250,000 - (1,250,000*20/100) = $1,000,000 Book value at end of 2017 = 1,000,000 - (1,000,000*20/100) = $800,000 Book value at end of 2018 = 800,000 - (800,000*20/100) = $640,000
Changing to straight line depreciation: Life remaining = 7 years Book value = $640,000
Depreciation expense per year = 640,000/7 = $91,428.57
Therefore, depreciation expense for 2019 = $91,428.57
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The reason is that the Internation Financial Reporting Framework says that though there are choices the company must opt to the depreciation method that brings fairness to the financial statement, which means that the method used calculates the depreciation for the year that actually represents the decrease in the value of the assets in market value. So if the current method brings the fairness to the Financial statements, Lucky can use them and if those don't bring fairness to the financial statements then its better to use alternative which will bring the fairness to financial statements.
