Question

Lambert Company acquired machinery costing $110,000 on January 2, 2016. At that time, Lambert estimated that the useful life of the equipment was 6 years and that the residual value would be $15,000 at the end of its useful life. Compute depreciation expense for this asset for 2016, 2017, and 2018 using the a. Straight-line method b. Double-declining balance method C. Assume that on January 2, 2018, Lambert revised its estimate of the useful life to 7 years and changed its estimate of the residual value to $ 10,000. What effect would this have on depreciation expense in 2018 for each of the above depreciation methods?

Answer 1

Answer:

Depreciation expense for               2016            2017             2018

Method: Straight-line                    $15,833      $15,833         $15,833

              Double-declining           $36,663     $24,443         $16,296

The revision of the estimates at the beginning of 2018 would lead to lower yearly depreciation expense.

Explanation:

(a) Under straight-line method, depreciation expense is (cost - residual value) / No of years = ($110,000 - $15,000) / 6 years = $15,833 yearly depreciation expense. This depreciation expense of $15,833 applies to Years 2016, 2017 and 2018. Accumulated depreciation for those years is $15,833 x 3 years $47,499.

(b) The double-declining method is otherwise known as the reducing balance method and is given by the formula below:

Double declining method = 2 X SLDP X BV

SLDP = straight-line depreciation percentage

BV = Book value

SLDP is 100%/6 years = 16.67%, then 16.67% multiplied by 2 to give 33.33%

At Year 2016, 33.33% X $110,000 = $36,663

At Year 2017, 33.33% X $73,337 ($110,000 - $36,663) = $24,443

At Year 2018, 33.33% X $48,894 ($73,337 - $24,443) = $16,296

Accumulated depreciation expense for Years 2016 to 2018, under this method, is $77,402 (addition of all the yearly depreciation).

(c) If after 2 years, the revised estimated useful life becomes 7 years and the residual value is $10,000, depreciation would be calculated as follows:

Under the straight-line method, NBV (net book value) at the end of 2017 is: $110,000 - $15,833 x 2 years = $78,334

Depreciation expense is: ($78,334 - $10,000) / 7 years = $9,762 (decrease in 2018 yearly depreciation charge)

Under the double-declining method, SLDP is 100%/7 years = 14.29%, then multiplied by 2 to give 28.57%.

At Year 2018, 28.57% X $48,894 ($73,337 - $24,443) = $13,969 (decrease in 2018 yearly depreciation charge)