Exercise: 2 A plant assets required at a total cost of $37,500 has an estimated

Question

Exercise: 2 A plant assets required at a total cost of $37,500 has an estimated scrap value of $2,500 and an anticipated useful life of 7 years. Determine: 1. The annual rate (expressed as a percentage or fraction) of depreciation using the straight-line-method. 2. The annual depreciation using the straight line method. 3. The first year's straight-line depreciation, assuming that the asset was acquired 3 months into the current accounting period. 4. Continuing with assumption (3), the value of the accumulated depreciation account after the second year's depreciation is recognized. 5. The residual value for the plant assets after the asset has been depreciated for 7 years. 6. Using the information presented at the beginning of the exercise 2, determine the five items assuming asset depreciation and using the double-declining method of recognizing depreciation. 7. Using the information presented at the beginning of the exercise 2, determine the five items assuming asset depreciation and using the sum of the years' digits method.

Explanation / Answer

Total Cost $                         37,500 Residual value $                            2,500 useful Life 7 Depreciable Value $                         35,000 2 Depreciation Amount per year 35000/7 $ 5,000 1 percentage of depreciation 5000/35000 14.29% 3 Depreciation for first year(Only 3 months) (5000/12)*3 $ 1,250 4 Accumulated Depreciation after 2nd year 1250+5000 6250 5 Residual value after 7 years 37500-1250-6*(5000) 6250 (Assumed 3 months only in first year) 6 Double Declining BalanceMethod Year Net book value, beginning of year Double-declining bal­ance depreciation computed as 2 × SL rate × beginning NBV Net book value, end of year 1 37500 10717.5 26782.5 2 26782.5 7654.44 19128.06 3 19128.06 5466.80 13661.26 4 13661.26 3904.39 9756.87 5 9756.87 2788.51 6968.36 6 6968.36 1991.56 4976.80 7 4976.80 2476.80 2500.00 Salvage Value Total 35000.00 7 Sum of years digit method(1+2+3+4+5+6+7=28) Year Depreciation Amount 1 (7/28)35000 8750 2 (6/28)35000 7500 3 (5/28)35000 6250 4 (4/28)35000 5000 5 (3/28)35000 3750 6 (2/28)35000 2500 7 (1/28)35000 1250 Total 35000

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