Burrell Company purchased a machine for $58,000 on January 2, 2019. The machine has an estimated...
Burrell Company purchased a machine for $58,000 on January 2, 2019. The machine has an estimated service life of 5 years and a zero estimated residual value. The asset earns income before depreciation and income taxes of $29,000 each year. The tax rate is 20%.
Required:
Compute the rate of return earned (on the average net asset value) by the company each year of the asset's life under the straight-line and the double-declining-balance depreciation methods. Assume that the machine is the company's only asset.
Straight-line method. If required, round to one decimal
place.
2019: ___ %
2020: ___ %
2021: ___ %
2022: ___%
2023: ___%
Double-declining-balance depreciation method. Round to two decimal places. Round your intermediate dollar value calculations to the nearest whole number.
2019: ___%
2020: ___%
2021: ___%
2022: ___%
2023: ___%
Homework Answers
Straight-line method:
Depreciation Expense = (Asset Value - Salvage Value) / Number of years of life
= ($58,000 - $0) / 5 Years
= $58,000/5 Years
= $11,600
Depreciation expense of $11,600 under straight-line method is always fixed in each year.
| Years | Opening book value of assets (a) | Depreciation Expense (b) | Ending book value of asset (a-b) |
| 2019 | $58,000 | $11,600 | $46,400 |
| 2020 | $46,400 | $11,600 | $34,800 |
| 2021 | $34,800 | $11,600 | $23,200 |
| 2022 | $23,200 | $11,600 | $11,600 |
| 2023 | $11,600 | $11,600 | $0 |
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Income before depreciation and income tax | $29,000 | $29,000 | $29,000 | $29,000 | $29,000 |
| Less: Depreciation expense | ($11,600) | ($11,600) | ($11,600) | ($11,600) | ($11,600) |
| Income before income taxes | $17,400 | $17,400 | $17,400 | $17,400 | $17,400 |
| Less: Income taxes ($17,400*20/100) | ($3,480) | ($3,480) | ($3,480) | ($3,480) | ($3,480) |
| Net Income after tax | $13,920 | $13,920 | $13,920 | $13,920 | $13,920 |
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Opening asset value (a) | $58,000 | $46,400 | $34,800 | $23,200 | $11,600 |
| Ending asset value (b) | $46,400 | $34,800 | $23,200 | $11,600 | $0 |
| Average asset value (c ) [(a+b)/2] | $52,200 | $40,600 | $29,000 | $17,400 | $5,800 |
| Net Income after tax (x) | $13,920 | $13,920 | $13,920 | $13,920 | $13,920 |
| Average assets value (y) | $52,200 | $40,600 | $29,000 | $17,400 | $5,800 |
| Rate of Return (x/y*100) | 27% | 34% | 48% | 80% | 240% |
| 2019 | 27% |
| 2020 | 34% |
| 2021 | 48% |
| 2022 | 80% |
| 2023 | 240% |
Double-declining balance method:
Depreciation Expense = Cost of Asset * 1/Number of years * 2
2019 = $58,000*1/5 * 2
= $23,200
2020 = ($58,000 - $23,200) * 1/5 * 2
= $13,920
2021 = ($58,000 - $23,200 - $13,920) * 1/5 * 2
= $8,352
2022 = ($58,000 - $23,200 - $13,920 - $8,352) * 1/5 * 2
= $5,011.20
2023 = ($58,000 - $23,200 - $13,920 - $8,352 - $5,011.20) * 1/5 * 2
= $3,006.72
| Years | Opening book value of assets (a) | Depreciation Expense (b) | Ending book value of asset (a-b) |
| 2019 | $58,000 | $23,200 | $34,800 |
| 2020 | $34,800 | $13,920 | $20,880 |
| 2021 | $20,880 | $8,352 | $12,528 |
| 2022 | $12,528 | $5,011 | $7,517 |
| 2023 | $7,517 | $3,007 | $4,510 |
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Income before depreciation and income tax | $29,000 | $29,000 | $29,000 | $29,000 | $29,000 |
| Less: Depreciation expense | ($23,200) | ($13,920) | ($8,352) | ($5,011) | ($3,007) |
| Income before income taxes | $5,800 | $15,080 | $20,648 | $23,989 | $25,993 |
| Less: Income taxes ($5,800*20/100); ($15,080*20/100); ($20,648*20/100); ($23,989*20/100); ($25,993*20/100) | ($1,160) | ($3,016) | ($4,130) | ($4,798) | ($5,199) |
| Net Income after tax | $4,640 | $12,064 | $16,518 | $19,191 | $20,794 |
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Opening asset value (a) | $58,000 | $34,800 | $20,880 | $12,528 | $7,517 |
| Ending asset value (b) | $34,800 | $20,880 | $12,528 | $7,517 | $4,510 |
| Average asset value (c ) [(a+b)/2] | $46,400 | $27,840 | $16,704 | $10,023 | $6,014 |
| Net Income after tax (x) | $4,640 | $12,064 | $16,518 | $19,191 | $20,794 |
| Average assets value (y) | $46,400 | $27,840 | $16,704 | $10,023 | $6,014 |
| Rate of Return (x/y*100) | 10% | 43% | 99% | 191% | 346% |
| 2019 | 10% |
| 2020 | 43% |
| 2021 | 99% |
| 2022 | 191% |
| 2023 | 346% |
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