On January 1, 2017, XYZ Company purchased a new machine for $175,000. The machin

Question

On January 1, 2017, XYZ Company purchased a new machine for $175,000. The machine was assigned a $25,000 residual value and a 10-year life. The machine was to be depreciated using the straight-line method, however, the company accountant incorrectly used the double-declining balance method in determining depreciation on the machine. Assume the error is not discovered. Calculate the amount that the total assets in the December 31, 2019 balance sheet would be understated by due to this error. Do not use decimals in your answer.

Explanation / Answer

Straight line rate = 100 / 10 = 10%

Double declining depreciation for 2017 = 175000 * 2 * 10% = 35000

Double declining depreciation for 2018 = (175000- 35000) * 2 *10% = 28000

Double declining depreciation for 2019 = (175000- 35000-28000) * 2 *10% = 22400

Book value at end of 2019 = 175000 - 35000 - 28000 - 22400 = 89600

Straight line book value at 2019 = 175000 - (175000 - 25000) /10 *3 = 130000

Understatement = 130000 - 89600 = 40400   

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