Question

17,780 6,000 11,780 Wilfred Trading Company Income Statement For the Year Ending 31 December 2019 Sales 19,780 Less Sales Returns and Allowances 2,000 Net Sales Cost of Goods Sold Gross Profit Less Operating expenses Salaries expense 3,460 Travel expense 1,300 Rent expense 1,200 Miscellaneous expense 230 Supplies expense 750 Depreciation expense 1,500 Insurance expense 200 Total Operating expenses Net Income before Interest and Tax Less Ineterst expense Net Income before Tax Income Tax expense Net Income /(Loss) 8,640 3,140 1,200 1,940 2,000 (60)

Answer 1

c) Suppose Wilfred Trading Company started operations on 1st dec 2018:

1. Years of Useful Life of All equipment under Straight Line Depreciation Method:

Straight Line Depreciation Method is followed . Equipment was purchased on 1.12.2018 for $15,000 ( From adjusted trial balance).Following is the formula for Depreciation under Straight Line Method.

Depreciation per year = ( Total cost of equipment - Residual Value ) / No. of useful years of life

We know from adjusted Trial Balance that the Depreciation Per year is $1,500 and Cost of equipment is $15,000.

Residual Value is given as $3,000. Entering these Values in the Formula

1,500 = (15,000 - 3,000) / No. of useful years of life.

1,500 = 12,000 / No. of useful years of life.

No. of useful years of life = 12,000 / 1,500

No. of useful years of life = 8 Years

2. Depreciation Expense for 2019 if Double declining balance Method is used:

Double Declining Balance method is the accelerated depreciation method under which the asset is depreciated at 200% of declining Balance method. So, in order to use this method first we have to calculate the Depreciation Percentage.

As we have already calculated the useful life of Equipment is 8 years. So Normal depreciation rate is 100/8 (i.e.,) 12.5%. But under Double Declining Balance method the Depreciation rate would be 2*12.5 (i.e.,) 25% on Diminishing Balance Method.

We need to calculate the depreciation expense for 2019. For that we should know the Beginning balance of equipment on 1.1.2019 as under Double Declining Balance method, depreciation is calculated on Book value of the asset and not on original cost.

In order to know the book value of equipment on 1.1.2019. we need to know the depreciation for 2018. so first lets calculate the depreciation for 2018.

Particulars	Amount ($)
Original Cost of equipment	15,000
Depreciation For 2018 (15,000*25%*1/12)	312.5
Closing Balance of Equipment for 2018	14,687.5

We have calculated Depreciation at 25% for 1 month because the asset was purchased only on 1.12.2018. So, the Beginning Balance for 2019 is $14,687.5

Depreciation Expense for 2019 = Beginning Balance of equipment for 2019 * Depreciation Rate

= 14,687.5 * 25%

Depreciation Expense for 2019 = $3,671.88

3. Why Wilfred Trading Company should choose Double declining balance Method:

Under Double Declining Balance method the Depreciation expenses would be higher in the initial years and will reduce gradually over the years of life of the assets. By Using this method Company will be Offset most of the depreciation in the initial useful life of the asset when it is new and provide maximum benefits. As years pass on the assets will become old and need more of repairs and Maintenance costs so decreased depreciation expense during later years of life of asset will help company to balance the expenses. Another advantage is that by using this method the company can get maximum tax deduction for depreciation in the initial years of useful life of the assets itself during which the revenue generated by the asset will be higher.

Other Method of Depreciation are Straight Line Method and Diminishing Balance Method. Under both these method the asset is depreciated at the normal depreciation rate spread across its useful life whereas under Double Declining Balance method the Depreciation is calculated at twice the rate of other methods.

Under Straight Line Method the Depreciation is calculated on Original Cost of the asset for all the years and the depreciation expense is spread evenly over all the years. Whereas under Diminishing Balance Method and Double Declining Balance method the Depreciation is calculated on the Bookvalue of the asset and not on the original cost of the asset. so the depreciation will be more in the initial years and less in the last years of the useful life of the assets.