Question

1. If Quick Company used Double Declining Balance (DDB) depreciation method instead of straight-line, calculate the following:
   1. Depreciation expense each year
   2. Accumulated depreciation each year
   3. Net book value each year
   4. Impairment loss (if any) at the end of year 4
   5. Comparing the impairment loss in d) with the impairment loss we calculated in class under the straight-line method, discuss the implication.
   6. 
      Quick Company acquired a piece of equipment in Year 1 at a cost of $100,000. The equipment has a 10-year estimated life, zero salvage value, and is depre- ciated on a straight-line basis. Technological innovations take place in the in- dustry in which the company operates in Year 4. Quick gathers the following information for this piece of equipment at the end of Year 4: Expected future undiscounted cash flows from continued use ... Present value of expected future cash flows from continued use Net selling price in the used equipment market. $59,000 51,000 50,000
      

Answer 1

Double-Declining Method The double declining rate is 2/Useful Life = 2/10 = 20% Year Computation Annual Depreciation Expense Cost Accumulated Depreciation Net Book Value $ 100,000 $ At Acquisition 1 2 3 4 Nm (100000*20%) (80000*20%) (108000*40%) (64800*40%) $ $ $ $ 20,000 16,000 12,800 10,240 $ 20,000 $ 36,000$ 48,800 $ 59,040 $ 100,000 80,000 64,000 51,200 40,960 $ Requirement a The depreciation expense for each year is- Year 1 - $20,000 ; Year 2 - $16,000 ; Year 3 - $12,800; Year 4 - $10,240 Requirement b The accumulated depreciation for each year is- Year 1 - $20,000; Year 2 - $36,000 ; Year 3 - $48,800 ; Year 4 - $59,040 Requirement c The net book value for each year is- Year 1 - $80,000; Year 2 - $64,000; Year 3 - $51,200; Year 4 - $40,960

Requirement d The recoverable value of the equipment at the end of year 4 is Higher of- (i) Present value of expected future cash flows from continuous use (ii) Net selling price in the used equipment $ $ 51,000 50,000 So, the recoverable value is $ 51,000 (being higher) The net book value at the end of Year using double declining balance method is $ 40,960 Since, the net book value is less than the recoverable value, there shall be no impairment loss. The impairment loss is $ 0 Requirement e If straight line method is used, the net book value shall be Cost - Accumulated Depreciation as at end of Year 4 [100000 - (100000*4/10)] = $ 60,000 The net book value is higher than the recoverable value using straight line method. So, the impairment loss is (Net Book value - Recoverable value) = (60000-51000) = $ 9,000
Formulas used in computing the values in double declining balance table-

A B с D E F G H Double-Declining Meth 3 4 5 1 2 3 4 5 The double declining rai Year Computation Annual Depreciation Expense Cost Accumulated Depreciation Net Book Value 100000 At Acquisition 1 6 7 8 9 10 11 12 8 9 2 (100000* 20%) =+G7* 20% (80000* 20%) =+G8* 20% (108000*40%) =+G9*20% (64800*40%) =+G10*20% =+F7+D8 =+F8+D9 =+F9+D10 =+F10+D11 =+$E$ 7-F7 =+$E$7-F8 =+$E$7-F9 =+$E$7-F10 =+$E$ 7-F11 3 4