Question

An equipment was acquired at the cost of $210,000has an estimated residual value of $24,000 and an estimated useful life of 10 years. It was placed into service on May 1" of the current fiscal year. Which end on December 31". 1. Determine the depreciation for the current year and the following year using: a. Straight-line method Year Depreciable Rate Annual Partial Current Year Accumulated Book Cost (SL) Depreciation | Year Depreciation Depreciation Value Expense Expense b. Double-Declining method Year Book Value Declining Annual Partial Balance Depreciation || Year Rate Expense Current Year Depreciation Expense Accumulated Book Depreciation Value

Answer 1

(a) Under the straight line method, depreciation is calculated by the following formula:

Depreciation = Cost - Residual value / Useful life

Cost = $210000, Residual value = $24000, useful life = 10

Depreciation = ($210000 - $24000) / 10 = $18600

Under straight line method, depreciation remains the same for every year. So annual depreciation expense is $18600.

We need to calculate partial year (8 months) depreciation i.e. from May 1st to Dec 31 current year.

Partial year depreciation = $18600 * 8 / 12 = $12400.

Accumulated depreciation is the depreciation charged till date. So, accumulated depreciation is $12400.

Book value = Cost - Accumulated depreciation

Book value on December 31 = $210000 - $12400 = $197600.

b Under double declining balance method, depreciation is calculated by the following formula:

Depreciation = 2 * 1 / N * (Cost - Accumulated depreciation)

where, n is the no. of years or useful life and accumulated depreciation is depreciation charged till date

For current year, accumulated depreciation will be zero.

So, depreciation for current year will be:

Depreciation for current year = 2 * 1 / 10 * ($210000 - 0)

Depreciation = 2 * 1 / 10 * $210000 = $42000

Partial year depreciation for 8 months will be:

Partial year depreciation = $42000 * 8 / 12 = $28000

Book value = Cost - Accumulated depreciation

Book value on December 31 = $210000 - $28000 = $182000.