CRP3 Q- Search in Document Home Insert Design Layout References Mailings Review

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CRP3 Q- Search in Document Home Insert Design Layout References Mailings Review View Share AaBbCcDdE AaBbCcDdE AaBbCcDd AaBbCcDdEe Paste NormalNo Spacing He ng 1Heading 2 SubtitleSubtle Emph. Problem 4: Change in depreciation estimates Universal Tools Company purchased a machine on July 1, 2015 for $180,000. The machine was estimated to have a useful life of 10 years and a salvage value of $20,000. The company's fiscal year ends on December 31 Required: 1) What was Universal Tools' depreciation expense for 2015 and 2016 under the Double- declining balance method? 2) Suppose on Jan. 1, 2017, Universal Tools decided that the machine's remaining useful life (starting from Jan. 1, 2017) was only 6 years and the salvage value was only $15,000 and that it was more appropriate to apply the straight-line depreciation method from then on. Calculate the depreciation expense for 2017. Page 5 of 11 1916 Words English (US) Focus 219%

Explanation / Answer

1)

Depreciation under double declining balance method

Double declining rate of depreciation

= [ 1 / Useful life ] x 2

= [1 / 10] x 2

= 0.20 or 20%

Depreciation under double declining rate is applied on the beginning value of asset at the beginning of the year or at the date of purchase

So, Depreciation

= Book value x Double declining rate x Number of months of use / Total months in a year

Number o f months from July to December = 6

So, Depreciation for 2015

= $180,000 x 20% x 6 / 12

= $ 18,000

So, book value at the beginning of 2016

Original cost – Depreciation for 2015

= $180,000 - $18,000

= $ 162,000

So, depreciation for 2016

= $162,000 x 20% x 12 / 12

= $ 32,400

2)

Similarly, Book value at the beginning of 2017

= $ 162,000 - $ 32,400

= $129,600

Depreciation under straight line rate

= (Purchase cost or book value – Salvage value) / Useful life x Months of use / Total months in a year

So, Depreciation for 2017

= ($129,600 - $15,000) / 6 x 12 / 12

= $19,100

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