Computing Depreciation Expense Equipment costing $290,000, with an expected scra
ID: 2489080 • Letter: C
Question
Computing Depreciation Expense Equipment costing $290,000, with an expected scrap value of $30,000 and an estimated useful life of 5 years, was purchased on January 1, 2012. Calculate the depreciation expense for years 2012 to 2016 using: (a) the straight-line method and (b) the double-declining-balance method. Cost of Equipment $ 290,000 Salvage Value $ 30,000 5 year depreciation schedule Straight-line depreciation Depreciation Expense Accumulated Depreciation Net Book Value (Cost of Asset less Accum. Dep) 2012 2013 2014 2015 2016 Double Declining depreciation [2/5 = 40%] Depreciation Expense Accumulated Depreciation Net Book Value (Cost of Asset less Accum. Dep) Hint: You do not include salvage value in your calculation Subsequent Year Depreciation is based off of Net Book value Do not depreciate asset below cost less salvage value 2012 2013 2014 2015 2016 Which method is typically preferred for: (a) income tax purposes? (b) financial reporting purposes? Computing Depreciation Expense Equipment costing $290,000, with an expected scrap value of $30,000 and an estimated useful life of 5 years, was purchased on January 1, 2012. Calculate the depreciation expense for years 2012 to 2016 using: (a) the straight-line method and (b) the double-declining-balance method. Cost of Equipment $ 290,000 Salvage Value $ 30,000 5 year depreciation schedule Straight-line depreciation Depreciation Expense Accumulated Depreciation Net Book Value (Cost of Asset less Accum. Dep) 2012 2013 2014 2015 2016 Double Declining depreciation [2/5 = 40%] Depreciation Expense Accumulated Depreciation Net Book Value (Cost of Asset less Accum. Dep) Hint: You do not include salvage value in your calculation Subsequent Year Depreciation is based off of Net Book value Do not depreciate asset below cost less salvage value 2012 2013 2014 2015 2016 Which method is typically preferred for: (a) income tax purposes? (b) financial reporting purposes?Explanation / Answer
Straight line method:
Depreciation
C-S/N
290000-30000/5
52000
Depreciation as per the straight line method
Years
Opening
Depreciation Expense
Accumulated Depreciation
Salvage value
Net Book Value
2012
2,90,000
52000
52000
0
2,38,000
2013
2,38,000
52000
104000
0
1,86,000
2014
1,86,000
52000
156000
0
1,34,000
2015
1,34,000
52000
208000
0
82,000
2016
82,000
52000
260000
30000
-
Double decline method:
Depreciation rate = (1/useful life) x 200%
= 1/5 x 200% = 20% x 2 = 40%
Year
Opening
Depreciation Rate
Depreciation
Accumulated Depreciation
Book Value
1
2,90,000
40%
1,16,000
1,16,000
1,74,000
2
1,74,000
40%
69,600
1,85,600
1,04,400
3
1,04,400
40%
41,760
2,27,360
62,640
4
62,640
40%
25,056
2,52,416
37,584
5
37,584
40%
7584(*)
2,60,000
30,000
(*) depreciation stops when book value = residual value
Depreciation amount for year 5
= beginning book value x depreciation rate
= $37,584 x 40% = $15,034 ??
For year 5, depreciation amount will not be $15,034.
If $15,034 is depreciated,
--> book value = $37,584 - $15,034 = $22,550
--> book value < residual value
Depreciation stops when book value = residual value
--> depreciation amount for year 5 = $7,584
--> book value = $37,584 - $7,584 = $30,000
Answer:
A) For income tax purpose we prefer double decline method.
B) For financial reporting purpose we prefer straight line method.
Depreciation
C-S/N
290000-30000/5
52000
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