Question

Computing Straight-line and Double-Declining-Balance Depreciation On January 2, Reed Company purchases a laser cutting machine for use in fabrication of a part for on of its key products. The machine cost $75,000, and its estimated useful life is five years, after which the expected salvage value is $5,000. For both parts a and b below: (1) Compute depreciation expense for each year of the machine's five-year useful life under that depreciation method. (2) Use the financial state- ments effects template to show the effect of depreciation for the first year only for that method. (When equipment is used exclusively in the manufacturing process, the depreciation is more accurately recorded as part of cost of goods sold and not as depreciation expense.) L04 E6-31. a. Straight-line b. Double-declining-balance

Answer 1

Answer:

1a. Straight line method            year1        year2         year3    year4     year5

depreciation expense            $14,000     14000       14000   14000     14000

b. Double declining balance   28000       28000     14000      0            0

2. FINANCIAL STATEMENT TEMPLATE FOR YEAR 1

Sales                                                    straight line              double declining

less cost of sales

          opening stock

          + purchases

           - closing stock

          + depreciation                        14000                            28000

       

Explanation:

straight line depreciation = (cost -salvage value) / useful life

                                          = ( $75,000 - $5000) / 5 years

double declining balance method = straight line * 2

                                                         = (100%/5yrs) *2

                                                          =40%

  75000-5000=70000*40% = $28000

the cost of sales in straight line increases by 14000 and by 28000 in double reducing which results in high profits in straight line than in double declining

The depreciation of the machine in year 3 is supposed to be 28000 but the carrying value of the machine is 14000 therefore the full carrying amount is depreciation and in year 4 and 5 there is no depreciable amount hence the nil depreciation.