A. Assume you own the machinery above. Calculate the annual depreciation expense

Question

A. Assume you own the machinery above. Calculate the annual depreciation expense using the straight-line method. Assume all machinery is bought at the first of the year.                                                                                       

Machine                                  Cost                 Salvage Value             Useful Life

1) Tractor A                            50,000                20,000                                  5

2) Tractor B                             60,000                  0                                         7

B. Calculate the double-declining annual depreciate expense for each tractor.

Calculate years 1 through 7 for both A and B.

Explanation / Answer

A. Straight line method:-

Depreciation per year = (Cost - Scrap value) ÷ Useful life

Depreciation per year of Tractor A = (50,000-20,000)÷5 = 30,000÷5 = $6,000

Depreciation per year of Tractor B = (60,000-0)÷7 = 60,000÷7 = $8,571

B. Double declining method:-

Depreciation rate under straight line = 1÷ Useful life × 100

Depreciation rate under double declining method = 2× Depreciation rate under straighter line

Tractor A:-

Depreciation rate under straight line = 1÷5×100 = 20%

Depreciation rate under double declining method = 2×20% = 40%

Tractor B:-

Depreciation rate under straight line = 1÷7×100 = 14.29%

Depreciation rate under double declining method = 2×14.29% = 28.58%

Depreciation under straight line Year Tractor A Tractor B 1 $6,000 $8,571 2 6,000 8,571 3 6,000 8,571 4 6,000 8,571 5 6,000 8,571 6 8,571 7 8,571

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