Question

A new barcode reading device has an installed cost basis of ​$20 comma 060 and an estimated service life of seven years. It will have a zero salvage value at that time. The 200​% declining balance method is used to depreciate this asset. a. What will the depreciation charge be in year seven​? b. What is the book value at the end of year six​? c. What is the gain​ (or loss) on the disposal of the device if it is sold for ​$500 after six ​years?

Answer 1

Answer:

a) $543.75

b) $1,903.20

c) $1,403.2 (loss)

Explanation:

Data provided in the question:

Cost basis for the device = $20,060

Useful life = 7 years

Salvage value = $0

Now,

Using the 200% declining balance method,

Rate of depreciation = $2\times\frac{\textup{1}}{\textup{Useful life}}$

or

Rate of depreciation = $2\times\frac{\textup{10}}{\textup{7}}$

or

Rate of depreciation = 0.2857 per year or 28.57% per year

Now,

Book value at the end of first year

=  $20,060 - 0.2857 × $20,060

= $14,328.57

Book value at the end of second year

=  $14,328.57 - 0.2857 × $4093.67

= $10234.9

Book value at the end of third year

=  $10234.9 - 0.2857 × $10234.9

= $7310.78

Book value at the end of fourth year

=  $7310.78 - 0.2857 × $7310.78

= $5222.08

Book value at the end of fifth year

=  $5222.08 - 0.2857 × $5222.08

= $3730.13

Book value at the end of fifth year

=  $3730.13 - 0.2857 × $3730.13

= $2664.43

Book value at the end of sixth year

=  $2664.43 - 0.2857 × $2664.43

= $1903.20

Therefore,

a) The depreciation charge in the year 7 will be

= 0.2857 × $1903.20

= $543.75

b) Book value at the end of year six = $1,903.20

c) The loss on the disposal of the device after six year for $500

= Selling cost - Book value

= $500 - $1,903.20

= -$1,403.2          [Here, negative sign means loss]