On January 2, 2018, the Jackson Company purchased equipment to be used in its ma

Question

On January 2, 2018, the Jackson Company purchased equipment to be used in its manufacturing process. The equipment has an estimated life of eight years and an estimated residual value of $45,250. The expenditures made to acquire the asset were as follows:

Jackson’s policy is to use the double-declining-balance (DDB) method of depreciation in the early years of the equipment’s life and then switch to straight line halfway through the equipment’s life.

Required:

1. Calculate depreciation for each year of the asset’s eight-year life.

Depreciation rate

2020

Purchase price $ 203,500 Freight charges 5,600 Installation charges 8,500

Explanation / Answer

Solution :

Depreciation rate SLM = 1/8 = 12.50%

Depreciation rate double declining method = 12.50*2 = 25%

Initial cost of equipment = $203,500 + $5,600 + $8,500 = $217,600

Ending book value at end of 2021 using DDB = $68,850

Salvage value at end of 8 years = $45,250

Annual depreciation using SLM = ($68,850 - $45,250)/4 = $5,900

Computation of Depreciation of each year Year Beginning Book Value Depreciation Rate Annual Depreciation Accumulated Depreciation Ending book value 2018 $217,600.00 25% $54,400.00 $54,400.00 $163,200.00 2019 $163,200.00 25% $40,800.00 $95,200.00 $122,400.00 2020 $122,400.00 25% $30,600.00 $125,800.00 $91,800.00 2021 $91,800.00 25% $22,950.00 $148,750.00 $68,850.00 2022 $68,850.00 $5,900.00 $154,650.00 $62,950.00 2023 $62,950.00 $5,900.00 $160,550.00 $57,050.00 2024 $57,050.00 $5,900.00 $166,450.00 $51,150.00 2025 $51,150.00 $5,900.00 $172,350.00 $45,250.00 Total $172,350.00

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