Answer:
Net book value (NBV) at the end of Year 2, under:
- straight-line method is $67,250
- units-of-production method is $21,800
- double-declining balance is $32,000
If there is need for NBV for Year 1, simply subtract the depreciation for Year from the cost.
Explanation:
Under straight-line method, depreciation expense is (cost - residual value) / Estimated useful life = ($128,000 - $6,500) / 4 years = $30,375 yearly depreciation expense.
Accumulated depreciation for 2 years is $30,375 x 2 years $60,750.
The net book value of the asset (cost - accumulated depreciation) is: $128,000 - $60,750 = $67,250.
The unit-of-production method is used when the asset value closely relates to the units of output it is able to produce. It is expressed with the formula below:
(Original Cost - Salvage value) / Estimated production capacity x Units/year
At Year 1, depreciation expense (DE) is: ($128,000 - $6,500) / 135,000 units x 58,000 units = $52,200/year
At Year 2, depreciation = ($128,000 - $6,500) / 135,000 units x 60,000 units = $54,000/year
Accumulated depreciation for 2 years is $52,200 + $54,000 = $106,200.
Note that this depreciation method results in higher depreciation charge when the asset is heavily used, at this time, it was in year 2.
The NBV under this method is is: $128,000 - $106,200 = $21,800.
The double-declining method is otherwise known as the reducing balance method and is given by the formula below:
Double declining method = 2 X SLDP X BV
SLDP = straight-line depreciation percentage
BV = Book value
SLDP is 100%/4 years = 25%, then 25% multiplied by 2 to give 50%
At Year 1, 50% X $128,000 = $64,000
At Year 2, 50% X $64,000 ($128,000 - $64,000) = $32,000
Accumulated depreciation for 2 years is $64,000 + $32,000 = $96,000.
The NBV under this method is is: $128,000 - $96,000 = $32,000.
