Question

A machine costing $180,000 was purchased May 1. The machine should be obsolete after four years and, therefore, no longer useful to the company. The estimated salvage value is $15,000. Calculate the depreciation expense for each year of its expected useful life using each of the following depreciation methods:
a. straight-line
b. double-declining balance.

For double-declining balance, do not round until your final answer. Round your final answers to the nearest dollar.

a. Straight-line:

Year 1: $0
Year 2: 0
Year 3: 0
Year 4: 0
Year 5: 0

b. Double-declining balance:
Year 1: $0
Year 2: 0
Year 3: 0
Year 4: 0

Answer 1

Answer:

In these calculations it is assumed that the accounting year is taken from May to May Next Year.

Depreciation Straight Line = $ 41250

Explanation:

Given

Cost $180,000

Life= 4 years

Salvage Value= $ 15000

Formula

Depreciation Straight Line Method= Cost - Salvage Value/ Useful Life

Straight Line Rate= 100%/ useful Life= 100%/4 = 25%

Double Declining Method = 2 * Straight Line Rate

Double Declining Method = 2 * Straight Line Rate= 2*25%= 50%

1. Depreciation Straight Line Method= Cost - Salvage Value/ Useful Life

Depreciation Straight Line Method= $ 180,000- $15,000/ 4= $ 41250

The depreciation expense using the straight line method does not change unless the salvage value is reached

Years     Depreciation    Accumulated Dep       Book Value

                                                                        (Cost - Accu. Dep)

a.Year 1        $ 41250        41250         $180,000  - 41250= 138,750

b.Year 2       $ 41250         82500          $180,000  -82500= 97,500

c. Year 3      $ 41250         123750         $180,000  - 123750= 56,250

d. Year 4      $ 41250          165000         $180,000  -165000 = 15000

e. Year 5                    Nil

So at the end of the fourth year the salvage value is reached.  From here the depreciation expense is not applied further.   These calculations indicate that the accounting year is taken from 1st May of the current year to the1st  May of the next year.

But if we take the accounting year from Jan to Dec the calculations would be the same but the table would be a bit different.

Years     Depreciation    Accumulated Dep       Book Value

                                                                       (Cost - Accu. Dep)

a.Year 1        $ 24062.5     24062.5       $180,000-24062.5= 155,937.5

b.Year 2       $ 41250         65 312.5        $180,000 - 65312.5= 114687.5

c. Year 3      $ 41250         106562.5        $180,000- 106562.5= 73,437.5

d. Year 4      $ 41250          148,687.5     $180,000- 148,687.5 = 31,312.5

e. Year 5         17817.5           165000                 15000

Here in the first year depreciation is calculated for 7 months and in the last year depreciation is calculated for 5 months.

41250/12 * 7= 24062.5

41250/12 *5= 17817.5

2.Straight Line Rate= 100%/ useful Life= 100%/4 = 25%

Double Declining Method = 2 * Straight Line Rate

Double Declining Method = 2 * Straight Line Rate= 2*25%= 50%

In double declining method the rate is multiplied to the cost to get the depreciation expense. 50 % of $ 180000= $ 90,000

Each year the rate is multiplied with the remaining book value after deducting the depreciation expense from the cost as $ 180,000- $ 90,000= $ 90,000

Next years depreciation will be $ 90,000 * 50%= $ 45000

This will be added in the original depreciation expense $90,000 + $ 45000 = $ 135,000 and deducted from cost to get the book value. $ 180,000- $ 135,000 = $ 45,000.

Again rate will be multiplied and each years depreciation will be calculated similarly.

It has been summarized in the table below.

Years        Dep Rate       Dep Expense     Accu. Dep.       Book Value

a. Year 1       50%             90,000             90,000                90,000

b. Year 2      50%             45,000             135,000               45000

c. Year 3      50%               22,500            157,500              22,500  

d. Year 4     50%               11250               168750               11250

e. Year 5     50%               5625                174375                Nil

Answer 2

Answer:

Straight line depreciation expense

Year 1 = $27,500

Year 2, 3 ,4 = $41,250

Double declining method

Year 1: $60,000

Year 2: $60,000

Year 3: $30,000

Year 4: $15,000

Explanation:

Straight line depreciation expense = (Cost of asset - Salvage value) / useful life

( $180,000 - $15,000) / 4 = $41,250

Depreciation expense every year would be 41250 expect in year 1 when the machine was used for only 8 months.

To determine the deprecation expense in the 1st year, determine the monthly deprecation expense.

41250 / 12 = 3,437.50

Depreciation for 1 st year = 3,437.50 x 8 = $27,500

Depreciation expense using the double declining method = Depreciation factor x cost of the asset

Depreciation factor = 2 x (1/useful life)

2 / 4 = 0.5

Depreciation expense in year one = 0.5 x $180,000 = $90,000

The same procedure for determining depreciation expense in year 1 under straight line depreciation would also be used here.

90,000 / 12 = $7,500

$7,500 x 8 = $60,000

Book value at the beginning of year 2 = $180,000 - $60,000 = $120,000

Depreciation expense in year 2 = 0.5 x $120,000 = $60,000

Book value at the beginning of year 3 = $120,000 - $60,000 = $60,000

Depreciation expense in year 3 = 0.5 x $60,000 = $30,000

Book value at the beginning of year 4 =$60,000 - $30,000 = $30,000

Depreciation expense in year 4 = 0.5 x $30,000 = $15,000

I hope my answer helps you