Question

Depreciation by Two Methods A storage tank acquired at the beginning of the fiscal year at a cost of $95,000 has an estimated residual value of $6,000 and an estimated useful life of 10 years. a. Determine the amount of annual depreciation by the straight-line method. x b. Determine the amount of depreciation for the first and second years computed by the double-declining-balance method. Do not round the double-declining balance rate. If required, round your answers to the nearest dollar. Depreciation Year 1 $ Year 2 $ Feedback

Answer 1

(1)straight line depreciation method depreciates asset by same amount every year. salvage value is deducted from cost and divided by useful life.

straight line depreciation = (cost - salvage) / useful life

=($95,000-$6,000)/10years

=$8,900 is the annual depreciation as per straight line method

(2) double declining method ignores salvage value. asset is depreciated at double rate on reducing asset balance.

double declining rate = 100%/ useful life * 2

=100/10 *2

=20%

years	beginning book value	depreciation rate	depreciation	book value at the end
1	$95,000	20%	$19,000[95000*20%]	$76,000[95000-19000]
2	$76,000	20%	$15,200[76000*20%]	$60,800[76000-15200]

as you can see that book value keep on reducing every year and double declining rate is applied to the reduced book value.