Question

Depreciation by Two Methods; Sale of Fixed Asset New tire retreading equipment, acquired at a cost of $110,000 on September 1 of Year 1 (beginning of the fiscal year), has an estimated useful life of four years and an estimated residual value of $7.500. The manager requested information regarding the effect of alternative methods on the amount of depreciation expense each year. On the basis of the data presented to the manager, the double-declining-balance method was selected On September 6 of Year 4, the equipment was sold for $18,000. Required: 1. Determine the annual depreciation expense for each of the estimated four years of use, the accumulated depreciation at the end of each year, and the book value of the equipment at the end of each year by (a) the straight line method and (b) the double-dedining balance method.

Answer 1

	(a)	Straight line method
		Year	Asset Book value beginning	Depreciation expense	Accumulated Depreciation	Book value at end of year
		1	$110,000	$25,625	$25,625	$84,375
		2	$84,375	$25,625	$51,250	$58,750
		3	$58,750	$25,625	$76,875	$33,125
		4	$33,125	$25,625	$102,500	$7,500
		Depreciation expense per annum = (Cost of asset-residual value)/Useful life of asset
		Depreciation expense per annum = ($110,000-$7,500)/4
		Depreciation expense per annum = $25,625
	(b)	Double declining balance method
		Depreciation rate under double declining method = 1/useful life of asset*2*100
		Depreciation rate under double declining method = 1/4*2*100
		Depreciation rate under double declining method = 50%
		Year	Asset Book value beginning	Depreciation expense(Beginning book value*50%)		Accumulated Depreciation	Book value at end of year
		1	$110,000	$55,000	(110,000*50%)	$55,000	$55,000
		2	$55,000	$27,500	(55,000*50%)	$82,500	$27,500
		3	$27,500	$13,750	(27,500*50%)	$96,250	$13,750
		4	$13,750	$6,250	(13750-7500)	$102,500	$7,500