Question

Problem 9-09A Ayayai Corporation purchased machinery on January 1, 2022, at a cost of $252,000. The estimated useful life of the machinery is 4 years, with an estimated salvage value at the end of that period of $30,200. The company is considering different depreciation methods that could be used for financial reporting purposes. Prepare separate depreciation schedules for the machinery using the straight-line method, and the declining-balance method using double the straight-line rate.

Answer 1

Calculation of depreciation charge:-
Straight Line Depreciation Method :-
	Depreciation Expense	=	Depreciable Amount
			Useful Life
	Depreciable Amount	=	Cost - Salvage value
	Cost	=	$252,000
	Salvage value (residual value)	=	$30,200
	Useful life	=	4	years
	Depreciable Amount	=	$252,000	-	$30,200
		=	$221,800
Straight line Depreciation Rate		=	100
			4
		=	25.00%
STARIGHT-LINE DEPRECIATION
	Computation					End of Year
Years	Depreciable Cost	×	Depreciation Rate	=	Annual Depreciation Expense	Accumulated Depreciation	Book Value (252000-Accumulated Depreciation)
2022	$221,800	×	25.00%	=	$                                  55,450	$        55,450	$      196,550
2023	$221,800	×	25.00%	=	$                                  55,450	$       110,900	$      141,100
2024	$221,800	×	25.00%	=	$                                  55,450	$       166,350	$        85,650
2025	$221,800	×	25.00%	=	$                                  55,450	$       221,800	$        30,200
Double Declining Balance Method :-
	Cost	=	$252,000
	Salvage value (residual value)	=	$30,200
	Useful life	=	4	years
Straight line Depreciation Rate		=	100
			4
		=	25.00%
Double (200%) Declining Balance Depreciation Rate		=	2 * 25% = 50%
	Depreciation Rate	=	50%
DOUBLE DECLIING BALANCE DEPRECIATION
Year	Computation					End of Year
	Beginning of Period Book Value	×	Depreciation Rate	=	Depreciation Expense	Accumulated Depreciation	Book Value
2022	$                               252,000	×	50.00%		$                                 126,000	$       126,000	$      126,000
2023	$                               126,000	×	50.00%		$                                   63,000	$       189,000	$        63,000
2024	$                                 63,000	×	50.00%		$                                   31,500	$       220,500	$        31,500
2025	$                                 31,500	×	4.13%		$                                     1,300	$       221,800	$        30,200
	Depreciation expense of 2025	=	Beginning Book Value	-	Salvage Value
		=	$                    31,500	-	$30,200
		=	$                     1,300
	Depreciation expense for 2025 is adjusted so that ending book value is equal to salvage value
	Depreciation Rate for 2025	=	$                     1,300	/	$                                   31,500
		=	4.13%
	Straight Line Depreciation Method results in higher reported 2022 income because straight line depreciation is less than the double declining balance depreciation in 2022

Feel free to ask any clarification, if required. Kindly provide feedback by thumbs up, if satisfied. It will be highly appreciated.
Thank you.