1/ The following information is available on a depreciable asset owned by Mutual

Question

1/

The following information is available on a depreciable asset owned by Mutual Savings Bank:

The asset's book value is $83,500 on July 1, Year 3. On that date, management determines that the asset's salvage value should be $6,500 rather than the original estimate of $11,500. Based on this information, the amount of depreciation expense the company should recognize during the last six months of Year 3 would be:

Multiple Choice

$4,812.50

$2,339.29

$2,609.38

$2,046.88

$2,406.25

2/

Martin Company purchases a machine at the beginning of the year at a cost of $80,000. The machine is depreciated using the double-declining-balance method. The machine’s useful life is estimated to be 4 years with a $6,600 salvage value. Depreciation expense in year 4 is:

Multiple Choice

$18,600.

$5,000.

$40,000.

$3,400.

$6,800.

Purchase date July 1, Year 1 Purchase price $101,500 Salvage value $11,500 Useful life 10 years Depreciation method straight-line

Explanation / Answer

Answer 1

Depreciation expense for last six months of Year 3

=[( July 1, Year 3 book value - revised salvage value ) / remaining useful life] *6/12

= [( $83,500 - $6,5000 / 8 years ] * 6 / 12 = $4,812.50 (option a )

Answer 2

Depreciated using the double-declining-balance method

= 2 * SLM rate * Book value at the beginning of the year ; where SLM rate = 1 / estimated useful life = 1 / 4 =0.25

Note : Depreciation under double-declining-balance method ceases when :

net book value = the estimated salvage value

Therefore , Depreciation expense in year 4 = $10,000 - $6,600 = $3,400 (option c)

Years Net book value at beginning of the year ($) Dep ($) = 2 * SLM rate * Book value at the beginning of the year Net book value at of the year ($) 1 80,000 2 * 0.25 * 80,000 = 40,000 40,000 2 40,000 2 * 0.25 * 40,000 = 20,000 20,000 3 20,000 2 * 0.25 * 20,000 = 10,000 10,000

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