A plant assets required at a total cost of $37,500 has an estimated scrap value
ID: 2421079 • Letter: A
Question
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 double declining balance 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.
Using the information presented at the beginning of the exercise, determine the five items assuming asset depreciation and using the sum of the years' digits method.
Explanation / Answer
cost- residual value=total depreciation in 7 years.
37500-2500=35000
1. annual depreciation= 35000/7=5000
% of annual depreciation= 5000/35000*100=14.28%.
2. anuual depreciation using double declining balance method-
The double declining balance method of depreciation, also known as the 200% declining balance method of depreciation, is a common form of accelerated depreciation. Accelerated depreciation means that an asset will be depreciated faster than would be the case under the straight line method. Although the depreciation will be faster, the total depreciation over the life of the asset will not be greater than the total depreciation using the straight line method. This means that the double declining balance method will result in greater depreciation expense in each of the early years of an asset's life and smaller depreciation expense in the later years of an asset's life as compared to straight line depreciation.
In the given case , rate of depreciation is 14.28% under straight line method. So accelerated rate would be twice the given rate i.e. 14.28*2.
book value - accumulated depreciation= 37500-0=37500
the annual depreciation =37500*28.57%=10713.75.
3.Under straight line method flat rate of depreciation is charged without considering the no. months it is used.
therefore, annual depreciation would be = 5000.
4. The accumulated depreciation in the second year would be= 5000+5000=10000.
5. The residual value for the plant assets after the asset has been depreciated for 7 years - 12752.82.
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