Question

On January 2, 2005 Garr Company acquired machinery at a cost of $320,000. This machinery was being depreciated by the double-declining-balance method over an estimated useful life of eight years, with no residual value. At the beginning of 2007 it was decided to change to the straight-line method of depreciation. Ignoring income tax considerations, the retrospective effect of this accounting change is:__________.

Answer 1

Answer:

The depreciation charge will be lower in 2007 using straight line method compared to the one produced by double-declining-balance method

Explanation:

Double-declining-balance method

Depreciation Expense = 2 × SLDP × BVSLDP

Therefore,

SLDP = 100 ÷ number of useful life

         = 100 ÷ 8

         = 12.5 %

Calculation of Depreciation Expenses (DE)

2005

DE = 2 × 12.5 % × $320,000

     = $80,000

2006

DE = 2 × 12.5 % × ($320,000 - $80,000)

     = $60,000

2007

DE = 2 × 12.5% × ($320,000 - $80,000 - $60,000)

     = $45,000

Using Straight line Method for 2007 Depreciation Expense

Accumulated Depreciation (2005 to 2006) = $80,000 + $60,000

                                                                         = $ 140,000

Depreciable Amount = Cost - Accumulated Depreciation

                                   = $320,000 - $140,000

                                   = $180,000

DE = (Cost - Residual Value) ÷ Remaining Useful Life

     = $180,000 ÷ 6

     = $30,000

Conclusion :

Comparing 2007 Depreciation Expense using double-declining-balance method against straight-line method of depreciation we can see that straight-line method of depreciation produces lower results.