Bryant Pharmaceuticals purchased a forklift on January 1, 2016, for $6,000. The

Question

Bryant Pharmaceuticals purchased a forklift on January 1, 2016, for $6,000. The forklift is expected to last for five years and have a residual value of $600. Bryant Pharmaceuticals uses the double-declining-balance method for depreciation Required: 1.) Calculate the depreciation expense, accumulated depreciation, and book value for each year of the forklift's life 2.) Prepare the journal entry to record depreciation expense for 2016 Prepare the jounal entry to record depreciation expense for 2016 3.) Refer to Exhibit 8-2. What factors may have influenced Bryant Pharmaceuticals to use the double-declining-balance method?

Explanation / Answer

Purchase price = $6,000

Resiual Value = $600

Estimated Life = 5 years

Depreciation Rate = 1/Useful life * 200% = 1/5 * 200% =40%

(1) Calculation of Depreciation expense, accumulated depreciation and book value for each year:

(*) Depreciation stops when book value = residual value

(2) Journal Entry:

(3) Double Declining Balance method causes the company's net income to be lower in the initial years as compared to straight line method since the rate is 200% of SLM. Still Bryant Pharmaceuticals may have used it in order to have a consistent combination of depreciation expenses and repairs and maintenance expenses during the life of the asset. In other words, while in early life, the repairs and maintenance expenses will be low and the depreciation expenses wil be high. In the late years of the asset's life, while the repairs and maintenance expenses will be high and the depreciation expenses will be low. Thus there would be a balance between the two expenses.

YEAR COST DEPRECIATION RATE DEPRECIATION ACCUMULATED DEPRECIATION BOOK VALUE 1 $6,000 40% $2,400 $2,400 3,600 2 40% $1,440 $3,840 2,160 3 40% $864 $4,704 1,296 4 40% $518.40 $5,222.4 777.60 5 40% $177.60(*) $5,400 600

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