Question

On January 1, 2012, Knapp Corporation acquired machinery at a cost of $750,000. Knapp adopted the double-declining balance method 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 2015, a decision was made to change to the straight-line method of depreciation for the machinery. The depreciation expense for 2015 would be a. a. a. $38,400.
b. $54,858.
c. $75,000.
d. $107,142.

Answer 1

Answer:

B .) $54,857

Explanation:

Depreciation rate using double reducing balance method is calculated as 10% divided by the number of years of useful life; this is then multiplied by 2. The depreciation is then calculated as the depreciation rate X  Net Book Value of the asset

The depreciation rate for the first year = 100%/10 * 2 = 20%

2012

The depreciation expense = 20% X $750,000 = $150,000

The net book value at the end of the year = $750,000 - $ 150,000 = $600,000

2013

The depreciation expense = 20% X $600,000 = $120,000

The net book value at the end of the year = $600,000 - $ 120,000 = $480,000

2014

The depreciation expense = 20% X $480,000 = $96,000

The net book value at the end of the year = $480,000 - $ 96,000 = $384,000

2015

At the beginning of 2015, the method was changed to straight line method. In line with the International Standards of Accounting on change in accounting estimates (ISA 8), this change would be applied progressively i.e the remaining net book value would be divided over the remaining no of useful life to arrive at the year depreciation

As at the beginning of 2015, 3 years have passed. The remaining  no of useful life is 7 years and the NBV is $384,000 as seen in the computation of NBV at the end of 2014

Depreciation = $384,000/7 = $54,857