Exercise 11-2 Ayayal Company acquired a plant asset at the beginning of Year 1.

Question

Exercise 11-2 Ayayal 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 prepared for this asset using (1) the straight-line method, (2) the sum-of-the-years'-digits method, and (3) the double- declining-balance method. Double- Sum-of-the Declining- Balance Year Straight-Line Years'-Digits $9,180 9,180 9,180 9,180 9,180 $45,900 $15,300 12,240 9,180 6,120 3,060 $45,900 $20,400 12,240 7,344 4,406 1,510 $45,900 3 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?

Explanation / Answer

          (1) Cost of asset being depreciated In double declining balance method of depreciation, depreciation is double the depreciation of straight line on book value of asset. In this question, staright line rate is 20%, as whole of asset has to be depreciated in 5 years. Now, depreciation in double declining balance method would be 40% of book value in first year. Hence book value/ cost of asset = $20,400 / 40% = $51,000           (2) Salvage value considered while making calculations = $51,000 - $45,900 $5,100           (3) Highest charge to income in year 1 will be made in case of double declining balance method of depreciation.           (4) Highest charge to income in year 4 will be made in case of straight line method of depreciation.           (5) Book value of asset at end of year 3 in all 3 methods are: Straight line =$51000 - ($9180*3) $23,460 Sum of digits method =$51000 - ($15300 + $12240 + $9180) $14,280 Double declining balance =$51000 - ($20400 + $12240 + $7344) $11,016 Highest book value at enf of year 3 is made in case of straight line method of depreciation

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