Answer:
1. We have:
Depreciation expense for 2014 = $920,000
Depreciation expense for 2015 = $1,472,000
2. We have:
Depreciation expense for 2014 = $1,152,000
Depreciation expense for 2015 = $1,843,200
3. Depreciation expense for 2016 = $1,972,000
Explanation:
1. Sum-of-the-years'-digits method.
Depreciable amount = Equipment cost – Salvage value = $5,760,000 - $240,000 = $5,520,000
Sum of the year digits = 5 + 4 + 3 + 2 + 1 = 15
Depreciation expense for a year = Depreciable amount * (Remaining years / Sum of the year digits) ………. (1)
Using equation (1), we have:
Depreciation expense for 2014 = $5,520,000 * (5 / 15) * (6 / 12) = $920,000
Depreciation expense for 2015 = $5,520,000 * (4 / 15) = $1,472,000
Accumulated depreciation at the end of 2015 = $920,000 + $1,472,000 = $2,392,000
Therefore, we have:
<u>Sum-of-the-Years'-Digits Method 2014 2015 </u>
Equipment $5,760,000 $5,760,000
Less: Accumulated Depreciation <u> (920,000) </u> <u> (2,392,000) </u>
Year-End Book Value <u> 4,600,000 </u> <u> 3,128,000 </u>
Depreciation Expense for the Year 920,000 1,472,000
2. Double-declining balance method.
Depreciable amount = Equipment cost – Salvage value = $5,760,000 - $240,000 = $5,520,000
Double-declining depreciation rate = Straight line depreciation rate * 2 = (1 / Number of estimated useful life) * 2 = (1 / 5) * 2 = 0.40, or 40%
Depreciation expense for 2014 = Equipment cost * Double-declining depreciation rate = $5,760,000 * 40% * (6 / 12) = $1,152,000
Depreciation expense for 2015 = (Equipment cost - 2014 Depreciation expense) * Double-declining depreciation rate = ($5,760,000 - $1,152,000) * 40% = $1,843,200
Accumulated depreciation at the end of 2015 = $1,152,000 + $1,843,200= $2,995,200
Note that under Double-declining balance method, the salvage value is not considered until the last year of the asset.
Therefore, we have:
<u>Double-Declining Balance Method 2014 2015 </u>
Equipment $5,760,000 $5,760,000
Less: Accumulated Depreciation <u> (1,152,000) </u> <u> (2,995,200) </u>
Year-End Book Value <u> 3,456,000 </u> <u> 2,073,600 </u>
Depreciation Expense for the Year 1,152,000 1,843,200
3. Compute the amount of depreciation expense for the 2016 income statement.
Straight line depreciation rate = 1 / Number of estimated useful life = 1 / 5 = 0.20, or 20%
Depreciable amount = Equipment cost – Salvage value = $5,760,000 - $240,000 = $5,520,000
Depreciation expense for 2014 = Depreciable amount * Straight line depreciation rate * (6 / 12) = $5,520,000 * 20% * (6 / 12) = $552,000
Depreciation expense for 2015 = Depreciable amount * Straight line depreciation rate = $5,520,000 * 20% = $1,104,000
Accumulated depreciation at the end of 2015 = $552,000 + $1,104,000 = $1,656,000
Net book value at end of 2015 = Equipment cost - Accumulated depreciation at the end of 2015 = $5,760,000 - $1,656,000 = $4,104,000
Depreciation expense for 2016 = (Net book value at end of 2015 - New Salvage value) / Remaining useful years = ($4,104,000 - $160,000) / 2 = $1,972,000
