Question

Hasselback Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods. You are to assume that the following schedules have been correctly prepared for this asset using (1) the straight-line method, (2) the sum-of-the-years'-digits method, and (3) the double-declining balance method.
Year
Straight-Line
Sum-if-the-Years'- Digits
Double Declining Balance

1 $9,000 $15,000 $20,000
2 9,000 12,000 12,000
3 9,000 9,000 7,200
4 9,000 6,000 4,320
5 9,000
3,000
1,480

Total $45,000
$45,000
$45,000



Answer the following questions.

(a) What is the cost of the asset being depreciated?(b) What amount, if any, was used in the depreciation calculations for the salvage value for this asset?(c) Which method will produce the highest charge to income in Year 1?
Double-declining balance methodSum-of-the-years'-digits methodStraight-line method(d) Which method will produce the highest charge to income in Year 4?

Straight-line methodSum-of-the-years'-digits methodDouble-declining balance method(e) Which method will produce the highest book value for the asset at the end of Year 3?

Sum-of-the-years'-digits methodStraight-line methodDouble-declining balance method(f) If the asset is sold at the end of Year 3, which method would yield the highest gain (or lowest loss) on disposal of the asset?

Double-declining balance methodStraight-line methodSum-of-the-years'-digits method

Answer 1

Answer:

(a) $50,000

(b) $5,000

(c) Double Declining Method.

(d) Straight-Line Method.

(e) Straight-Line Method.

(f) Double Declining Method.

Explanation:

(a) The cost of the asset being depreciated is $50,000.

By using values from Double Declining Method:

Cost of the Asset x DDB Rate = Depreciation Expense

or

Cost of the Asset x 40% = $20,000

Cost of the Asset = $50,000

Where DDB Rate is calculated as follows:

DDB Rate = 2 x (1 / useful life)

DDB Rate = 2 x (1 / 5)

DDB Rate = 2 x 20%

DDB Rate = 40%

(b) The Salvage value of this asset is $5,000.

Salvage Value = Cost of the Asset - Accumulated Depreciation

Salvage Value = $50,000 - $45,000

Salvage Value = $5,000

(c) The highest charge to income in Year 1 will be produced by Double Declining Balance Method.

(d) Straight-line method will produce the highest charge to income in Year 4 with $9,000.

(e) Straight Line:

Book Value = $50,000 - ($9,000 + $9,000 + $9,000)

Book Value = $23,000

Sum of the years' digits:

Book Value = $50,000 - ($15,000 + $12,000 + $9,000)

Book Value = $14,000

Double Declining:

Book Value = $50,000 - ($20,000 + $12,000 + $7,200)

Book Value = $10,800

Hence Straight Line method will produce the highest book value for the asset at the end of Year 3.

(f) If the asset is sold at the end of Year 3, Double Declining method would yield the highest gain (or lowest loss) on disposal of the asset, as it has the lowest book value at the end of year 3.