Question

Joss Stone Inc. purchased a large generator for its power plant for $3,500,000. Its useful life is estimated to be 20 years and its estimated hours of service will be 10,000,000 hours. The generator will be installed within the power plant for an additional cost of $500,000. Training costs to get the generator up and running will $1,500,000. Company executives are debating which depreciation method to adopt and want from you a proposed five-year depreciation expense schedule using two depreciation methods: Straight Line – Double Declining Balance.

Answer 1

Particulars Amount Cost of Power Plant $3,500,000 Installation Cost $500,000 Training and Testing Cost $1,500,000 Total Cost of Plant $5,500,000 1. First Five Year Depreciation Expense Schedule (Straight Line Method) Annual Straight Line Depreciation Value of Asset $5,500,000 Less: Residual/Scrap Value Depreciable Value $5,500,000 Estimated Useful Life of Asset (In Years) Annual Straight Line Depreciation Expense $275,000 $0 20 2 Straight Line Depreciation for the period Year Depreciation Expenses (Straight Line Method) 1 $275,000 $275,000 3 $275,000 4 $275,000 5 $275,000 Total $1,375,000 2. The formula for double declining balance is: Annual depreciation = Book Value * 100% / life * 2 Calculate the percentage that should be used first. Percentage = 100%/Useful Life x 2 = 100%/20 x 2 = 10% DDB Depreciation for the period End of Period Beginning Year of period Depreciation Depreciation Accumulated) Book book Rate Expenses Depreciation Value value Year 1 5,500,000 10% 550,000 550,000 4,950,000 Year 2 4,950,000 10% 495,000 1,045,000 4,455,000 Year 3 4,455,000 10% 445,500 1,490,500 4,009,500 Year 4 4,009,500 10% 400,950 1,891,450 3,608,550 Year 5 3,608,550 (10% 360,855 2,252,305 3,247,695 TOTAL 2,252,305