Question

Problem 3 (6 points) XYZ Co. purchased a new piece of equipment for $340,000 on January 1, 2015. In addition to the purchase price of $340,000, the company also paid $10,000 to have the equipment delivered and $50,000 to have it installed. XYZ Co. estimates the equipment to have a useful life of 4 years and that they will be able to sell it for $110,000 at the end of the fourth year. Required: Calculate the amount of depreciation expense recorded by XYZ Co. during 2015 and 2016 if it uses the Double-Declining Balance depreciation method. (6 points)

Answer 1

While Capitalizing an asset, associated other costs like Transportation, Insurance, Assembling or Installation cost, associated taxes has to be capitalized. Once asset has been put to use, if any such expense are incurred in future, depending on the nature of expense, either it may get capitalized or expensed off.

In the said example, asset purchased on Jan 1, 2015 has associated cost of Delivery and Installation and hence it has to be capitalized along with asset. Here's the Depreciation workings:

Description	Ref	Amount
Purchase price of equipment	A	$        340,000
Add: Delivery charges	B	$          10,000
Add: Installation charges	C	$          50,000
Original cost of asset	D=A+B+C	$        400,000
Salvage Value	E	$        110,000
Useful life (in years)	F	4
Depreciation % under Double Declining method = (100% divided by useful life)multiplied by 2	G=(100%/F)*2	50%
Depreciation for Year 1 = Original cost of asset multiplied by Depreciation %	H=(D)*G	$        200,000
C/F value of asset in year 2 after Depreciation in year 1	I=D-H	$        200,000
Depreciation for Year 2 =Original cost of asset multiplied by Depreciation %	J=(I)*G	$        100,000
If Depreciation for year 2 gets accounted as above, Then c/f value of asset in year 2 becomes	K=I-J	$        100,000
But Salvage value	E	$        110,000
C/f value of asset cannot be less than Salvage value, hence account depreciation expense for year 2 as difference between c/f value less salvage value	If K<E then I-E, else J and continue same steps for next year till estimated useful life of asset	$          90,000

Thus, amount of Depreciation Expense to account in year 2015 = $ 145,000

Dr. Depreciation Expense 145,000

Cr. Accumulated Depreciation-Equipment 145,000

(Being Depreciation for year 2015 accounted)

And, amount of Depreciation Expense to account in year 2016 = $ 145,000

Dr. Depreciation Expense 90,000

Cr. Accumulated Depreciation-Equipment 90,000

(Being Depreciation for year 2016 accounted)