Question

Pollyanna Publishing, a textbook publishing firm, purchased a new machine for $80,000. This machine is expected to operate for 10 years, after which it will be sold for salvage value (estimated to be $8,000).
A. How much will the first and second year’s depreciation expense be under the double-declining-balance method?
B. How much will the first and second year’s depreciation expense be under the straight line method?

Answer 1

Answer:

A.

The first year’s Depreciation Expense: $14,400

The second year’s depreciation expense: $11,520

B.

The first year’s Depreciation Expense = The second year’s depreciation expense = $7,200

Explanation:

A. Under the straight-line method, useful life is 10 years, so the asset's annual depreciation will be 10% of the Depreciable cost.

Depreciable cost = Total asset cost - salvage value =  $80,000-$8,000 = $72,000

Under the double-declining-balance method the 10% straight line rate is doubled to 20% - multiplied times the Depreciable cost's book value at the beginning of the year.

In the first year, depreciation expense = 20% x $72,000  = $14,400

At the beginning of the second year, the Depreciable cost's book value is $72,000 -$14,400 = $57,600

In the second year, depreciation expense = 20% x $57,600  = $11,520

B.

The company uses straight-line depreciation, Depreciation Expense each year is calculated by following formula:  

Depreciation Expense = (Cost of machine − salvage value)/Useful Life = ($80,000-$8,000)/10 = $7,200

The first year’s Depreciation Expense = The second year’s depreciation expense = $7,200