CALCULATOR FULL SCREEN PRINTER VERSION BACK NEXT Exercise 11-2 Grouper Company a

ID: 2570306 • Letter: C

Question

CALCULATOR FULL SCREEN PRINTER VERSION BACK NEXT Exercise 11-2 Grouper Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods. You are to assume that the following schedules have been correctly pre for this asset using (1) the straight-line method, (2) the sum-of-the-years- digits method, and (3) the double-declining-balance method Sum-of-the Double-Decdining Year Straight-Line Years'-Digits Balance $12,780 12,780 12,780 12,780 12,780 $63,900 $21,300 17,040 12,780 8,520 4,260 $63,900 $28,400 17,040 10,224 6,134 2,102 $63,900 2 3 4 Total Answer the following questions. What is the cost of the asset being depreciated? Cost of asset What amount, if any, was used in the depreciation calculations for the salvage value for this asset? Salvage value s Version 4.24.2.4 1059 AM Inc. All Rights Reserved. A Division of acy Policy1 2000-2017 1ohn W

Explanation / Answer

Solution:

We need to know first about the Straight line and Double Declining method

Straight Line Method

Straight line method is a method of calculating depreciation of an asset.

Under this method depreciation is calculated by dividing depreciable asset value by estimated useful life.

Depreciable Asset Value = Cost of Asset – Salvage Value

In this method, there is same depreciation each year.

Mathematically,

Annual Depreciation = (Cost of Asset – Salvage Value) / Useful life

Declining-balance method at double the straight-line rate

It is a method of depreciation used by the companies when they want to quickly depreciate an asset.

The asset will depreciate much faster under this method than straight-line because we double the percentage that would be depreciated each year under straight-line.

Salvage value is not subtracted from Cost of Asset when depreciation is calculated by using this method.

The formula for double declining balance is:

Annual depreciation = Book Value * 100% / life * 2

Calculate the percentage that should be used first.

Percentage = 100% / Useful Life x 2

Once the percentage is calculated, it is the same for the rest of the asset’s life.

As explained above, double declining method uses Book Value of the Asset instead of Depreciable Value.

Depreciable Value = Cost of Asset – Salvage Value

Book Value = Cost of Asset for First year depreciation

So, we can calculate Book Value i.e. Cost of Asset using Double Declining Method..

Depreciation Rate = 100% / Life * 2 = 100% / 5 x 2 = 40%

Depreciation Expense for Year 1 = Book Value x 40%

$28,400 = Book Value x 40%

Book Value = 28,400 / 40% = $71,000

Cost of Asset = $71,000

Salvage Value

Salvage Value we can find out from Straight Line method, since straight line method depreciate the asset till the Depreciable Value of Asset

Accumulated Depreciation using Straight Line Method = Cost of Asset – Salvage Value

$63,900 = $71,000 – Salvage Value

Salvage Value = 71,000 – 63,900 = $7,100

The method that produces the highest charge to income in Year 1 is Double Declining Balance

The method that produces the highest charge to income in Year 4 is Straight Line Method

We need to calculate the Book Value at the end of Year 3 to answer next 2 parts

Straight Line

Sum of the year digit

Double Declining

Cost of Asset (A)

71000

Accumulated Depreciation for 3 years (B)

38340

51120

55664

Book Value at the End of Year 3 (A - B)

32660

19880

15336

The method that produces the highest book value for the asset at the end of Year 3 is Straight Line Method

The method that will yield the highest gain (or lowest loss) on disposal of asset if the asset is sold at the end of Year 3 is Double Declining Balance

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you