Answer the following questions concerning the choice of depreciation method for an asset that has a...
Answer the following questions concerning the choice of depreciation method for an asset that has a 10-year life, straight line or double declining balance.
Which depreciation method will show the highest amount of income tax expense in the first year of owning the asset?
Which depreciation method will show the higher book value of the asset at the end of the first year?
Which depreciation method would most likely result in a gain if the asset was sold at the end of the third year of ownership?
Homework Answers
| Straight Line Depreciation | Double Declining method | ||||
| 1) | Higher income tax expense as compared to Double declining method in the first year of owning assets. | ||||
| 2) | Higher book value at the end of first year | ||||
| 3) | Loss arises if assets is sold at the end of third year. | Gain arises if assets is sold at the end of third year. | |||
| Lowe Depreation means higher income and higher tax. | |||||
| Higher depreciation means lower net income and lower tax. | |||||
| For Example | |||||
| a) | Straight Line Method | ||||
| Cost of Assets | $ 3,00,000.00 | ||||
| Salvage Value | $ 30,000.00 | ||||
| Estimated Useful life | 10 | Years | |||
| Depreciation Amount=(Cost-Scrap Value)/Useful life=($300000-$30000)/10 | $ 27,000.00 | ||||
| Year | Cost | Depreciation | Accumulated Depreciation | Book Value | |
| 01-01-2013 | $ 3,00,000.00 | $ 3,00,000.00 | |||
| 31-12-2013 | $ 27,000.00 | $ 27,000.00 | $ 2,73,000.00 | ||
| 31-12-2014 | $ 27,000.00 | $ 54,000.00 | $ 2,46,000.00 | ||
| 31-12-2015 | $ 27,000.00 | $ 81,000.00 | $ 2,19,000.00 | ||
| 31-12-2016 | $ 27,000.00 | $ 1,08,000.00 | $ 1,92,000.00 | ||
| 31-12-2017 | $ 27,000.00 | $ 1,35,000.00 | $ 1,65,000.00 | ||
| 31-12-2018 | $ 27,000.00 | $ 1,62,000.00 | $ 1,38,000.00 | ||
| 31-12-2019 | $ 27,000.00 | $ 1,89,000.00 | $ 1,11,000.00 | ||
| 31-12-2020 | $ 27,000.00 | $ 2,16,000.00 | $ 84,000.00 | ||
| 31-12-2021 | $ 27,000.00 | $ 2,43,000.00 | $ 57,000.00 | ||
| 31-12-2022 | $ 27,000.00 | $ 2,70,000.00 | $ 30,000.00 | ||
| $ 2,70,000.00 | |||||
| Double Declining Balance Method | |||||
| Cost of Assets | $ 3,00,000.00 | ||||
| Salvage Value | $ 30,000.00 | ||||
| Estimated Useful life | 10 | Years | |||
| Formula for Double declining rate method | |||||
| Depreciation Rate=(1/uesful life)*200% | |||||
| Depreciation Rate= | 0.1 | ||||
| Double Declining Rate(.25*200%) | 0.2 | ||||
| Double Declining Rate | 20.00% | ||||
| Year | Cost | Depreciation Rate | Depreciation | Accumulated Depreciation | Book Value |
| 01-01-2013 | $ 3,00,000.00 | $ - | $ 3,00,000.00 | ||
| 31-12-2013 | 20.00% | $ 60,000.00 | $ 60,000.00 | $ 2,40,000.00 | |
| 31-12-2014 | 20.00% | $ 48,000.00 | $ 1,08,000.00 | $ 1,92,000.00 | |
| 31-12-2015 | 20.00% | $ 38,400.00 | $ 1,46,400.00 | $ 1,53,600.00 | |
| 31-12-2016 | 20.00% | $ 30,720.00 | $ 1,77,120.00 | $ 1,22,880.00 | |
| 31-12-2017 | 20.00% | $ 24,576.00 | $ 2,01,696.00 | $ 98,304.00 | |
| 31-12-2018 | 20.00% | $ 19,660.80 | $ 2,21,356.80 | $ 78,643.20 | |
| 31-12-2019 | 20.00% | $ 15,728.64 | $ 2,37,085.44 | $ 62,914.56 | |
| 31-12-2020 | 20.00% | $ 12,582.91 | $ 2,49,668.35 | $ 50,331.65 | |
| 31-12-2021 | 20.00% | $ 10,066.33 | $ 2,59,734.68 | $ 40,265.32 | |
| 31-12-2022 | 20.00% | $ 10,265.32 | $ 2,70,000.00 | $ 30,000.00 | |
| $ 2,70,000.00 | $ 13,68,938.73 | ||||
| If Assets is sold for $170000 at the end of 3rd year | |||||
| Book Value under straight Line | $ 2,19,000.00 | ||||
| Book Value under Double Declining | $ 1,53,600.00 | ||||
| Sales Value | $ 1,70,000.00 | $ 1,70,000.00 | |||
| Gain/Loss | $ (49,000.00) | $ 16,400.00 |
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