Answer:
a. Calculate the depreciation expense for each of the five years, assuming the use of straight-line depreciation.
The formula is:
Straight-line depreciation: (cost of asset - salvage value) / useful life
Depreciation: ($40,000 - $5,000) / 5
Depreciation = $7,000 for each year
b. Calculate the depreciation expense for each of the five years, assuming the use of double-declining-balance depreciation.
The formula is:
2 X (Cost of asset / useful life )
2 X ($40,000 / 5 )
Depreciation = $16,000 for first year
$9,600 for second year
$5,760 for the third year
$3,456 for fourth year
$184 for fifth year
c. Assume that Becker Office Service sold the computer system at the end of the fourth year for $15,000. Compute the amount of gain or loss using each depreciation method.
Under the straight line depreciation method, by the four year, we have an accumulated depreciation of $7,000 x 4 = $28,000, so the net book value of the asset is $40,000 - $28,000 = $12,000.
If the computer system is sold for $15,000, the capital gain is of $12,000.
Under the double declining method, accumulated depreciation by the four year is $34,816, so the book value of the asset is only $5,184, and the sale of $15,000 would net a capital gain of $9,816.
