Question

Whispering 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-of-the- Years'-Digits Double-Declining- Balance 1 $10,980 $18,300 $24,400 2 10,980 14,640 14,640 3 10,980 10,980 8,784 4 10,980 7,320 5,270 5 10,980 3,660 1,806 Total $54,900 $54,900 $54,900

Answer 1

Solution:

The basis of the straight line is a depreciation and amortization process estimate. That is the best way to calculate the loss of value of a capital asset over time also known as direct depreciation.

The straight line basis is determined by dividing by either the number of years it is planned to use the variations between the cost of such an asset and the estimated recovery value.

--- use double-declining value year 1

(1/5) x 2 = 0.40

--- Cost x 40% = 22400

--- 22400 / 0.40 = 56,000

Savage value:

56,000 - 50,400 = 5,600