Question

Mini-Exercise 6.3 LO 3 Depreciation calculation methods Gandolfi Construction Co. purchased a used CAT 336DL earth mover at a cost of $500,000 in January 2016. The company's estimated use- ful life of this heavy equipment is 10 years, and the estimated salvage value is $100,000. Required: a. Using straight-line depreciation, calculate the depreciation expense to be recognized for 2016, the first year of the equipment's life, and calculate the equipment's net book value at December 31, 2018, after the third year of the equipment's life. Using declining-balance depreciation at twice the straight-line rate, calcu- late the depreciation expense to be recognized for 2018, the third year of the equipment's life.

Answer 1

SOLUTION - A
	CALCULATION OF THE DEPRECIATION AS PER STRAIGHT LINE
	Purchase Cost of Equipment	$                  5,00,000
	Less: Salvage Value	$                  1,00,000
	Net Value for Depreciation	$                  4,00,000
	Usefule life of the Assets	10 years
	Depreciation per year = Value for Depreciation / 10 years =	$                     40,000
	Total Depreciation for the per year	$                     40,000
ANSWER =
	Depreciation expenses for the year 2016 =	$                     40,000
	DEPRECIATION SCHEDULE - STRAIGHT LINE METHOD
		Income Statement		Balance Sheet
	Year	Depreciation Expenses	Cost	Accumulation Depreciation	Book Value
	At Acquisition		$          5,00,000		$                   5,00,000
	Depreciation for Year 2016	$                     40,000		$              40,000	$                   4,60,000
	Depreciation for Year 2017	$                     40,000		$              80,000	$                   4,20,000
	Depreciation for Year 2018	$                     40,000		$          1,20,000	$                   3,80,000
ANSWER =
	Equipment's Net Book Value at December 31, 2018 =	$                  3,80,000
SOLUTION - B
	CALCULATION OF THE DEPRECIATION AS PER DECLINE METHOD OF EQUIPMENT
	Rate of Depreciation =
	Rate of Depreciation = (1 / 10 Years )	0.10 or 10.00%
	Double decline deprection rate = 10% * 2 =	20.0%
	Depreciation for the year 1 =
	Purchase Value (Including installantion and delivery Cost) =	5,00,000
	Depreciation for the year 2016 @ 20.00% =	1,00,000
	Closing Value of year 2016	4,00,000
	Opening Balance of the year 2017	4,00,000
	Depreciation for the year 2017 @ 20.00% =	80,000
	Closing Value of year 2017	3,20,000
	Opening Balance of the year 2018	3,20,000
	Depreciation for the year 2018 @ 20.00% =	64,000
	Closing Value of year 2018	2,56,000
ANSWER =
	Depreciation expenses for the year 2018 = $ 64,000