Question

Freedom Co. purchased a new machine on July 2, 2019, at a total installed cost of $40,000. The machine has an estimated life of five years and an estimated salvage value of $6,700.

Required:

1. Calculate the depreciation expense for each year of the asset's life using:
   1. Straight-line depreciation.
   2. Double-declining-balance depreciation.
2. How much depreciation expense should be recorded by Freedom Co. for its fiscal year ended December 31, 2019, under each method? (Note: The machine will have been used for one-half of its first year of life.)
3. Calculate the accumulated depreciation and net book value of the machine at December 31, 2020, under each method.

Answer 1

1. Straight line method

Cost of machine	$   40,000
Less: Salvage value	$   (6,700)
Depreciable value	$   33,300
Life of the machine	5 Years
Depreciation per year ($33,300/5)	$     6,660
Depreciation 2019 ($6,660/12*6)	$     3,330
Depreciation 2020	$     6,660
Depreciation 2021	$     6,660
Depreciation 2022	$     6,660
Depreciation 2023	$     6,660
Depreciation 2024 ($6,660/12*6)	$     3,330

2. Double declaining balance method

Year - a	Net Book value, beginning of year - b	Double declained depreciation - (c = b/Life of assets*2	Net book value, End of the year - d = b-c
2019	40,000	$40,000/5*2*6/12 = $8,000	32,000
2020	32,000	12,800	19,200
2021	19,200	7,680	11,520
2022	11,520	4,608	6,912
2023	6,912	$6,912-$6,700 = $212	6,700

	Straight line	Double declaining
Depreciation for 2019	$                                       3,330	$                                          8,000
Accumulated depreciation	$3,330+$6,660 = $9,990	$8,000+$12,800 = $20,800
Net book value	$40,000-$9,990 = $30,010	$40,000-$20,800 = $19,200

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