Question

Depreciation SchedulesDunn Corporation acquired a newr depreciable asset for $135,000. Theasset has a 5-year expected life and a residual value of zero.Required:1. Prepare a depreciation schedule for all 5 years of the asset’s expectedlife using the straight-line depreciation method.2. Prepare a depreciation schedule for all 5 years of the asset’s expectedlife using the double-declining-balance depreciation method.3. CONCEPTUAL CONNECTION What questions should be asked aboutthis asset to decide which depreciation method to use?

Answer 1

Answer with explanation:

Part 1. Straight-line depreciation can be calculated using the following formula:

Straight-line depreciation = (Cost of Asset - Residual Value) / Useful Life

Now by putting the values of each parameter, we have:

Straight-line depreciation = ($135,000 - Zero) / 5years = $27,000

So this depreciation will be charged to the asset to remainder of its life.

Part 2. We can calculate depreciation using double declining balance method whose formula is as under:

Double Declining Balance Depreciation = 2 X Cost of the asset/Useful Life

By putting values, we have:

Double Declining Balance Depreciation = 2 * $135,000 / 5 Years = $54,000

The depreciation would be charged each year unless it fells below the salvage value of the asset, which in this question is given and is zero.

Part 3.

Following are the main questions that we must consider before opting to any depreciation method:

1. Does the cost of the asset chosen is accurate and in-accordance to International Financial Reporting Standards.
2. Does the estimated Residual value of the asset is forecasted accurately. International accounting standard IAS 16 says that the scrap value must be discounted and its present value must be considered as a scrap value.
3. Is the useful life of the asset estimated is in-accordance to the pace of technological advances?
4. The asset's fair value must be considered each year to analyze whether or not the asset value in the market is aligned with our carrying value calculated or not.

So these were the factors which decides which method of depreciation must be opted or what estimate changes are required in calculating the fair value of the asset.