Assignment Exercise 8–3: Depreciation Concept Assume that MHS purchased two addi
ID: 2745480 • Letter: A
Question
Assignment Exercise 8–3: Depreciation Concept
Assume that MHS purchased two additional pieces of equipment on April 1 (the first day of its fiscal year), as follows:
1. The laboratory equipment cost $300,000 and has an expected life of = years. The salvage value is 5% of cost. No equipment was traded in on this purchase.
2. The radiology equipment cost $800,000 and has an expected life of 7 years. The salvage value is 10% of cost. No equipment was traded in on this purchase.
Required
For both pieces of equipment:
1. Compute the straight-line depreciation.
2. Compute the double-declining balance depreciation.
Explanation / Answer
Note: For equipment costing $300,000, there is no information given about useful life of equipment. So, I assume it to be 5 years.
Formulas:
Straight line method = 100% cost of equipment / Useful life of equipment
Double-declining balance (ceases when the book value = the estimated salvage value)
2 × Straight-line depreciation rate × Book value at the beginning of the year
Depreciation of laboratory equipment:
Straight line depreciation of laboratory equipment = $300,000/5 = $60,000
Double-declining balance depreciation:
Year
Net Book Value - Beginning of Year
2 x SL rate x Beginning NBV
Net Book Value - End of year
1
$300,000
$120,000
$180,000
2
$180,000
$72,000
$108,000
3
$108,000
$43,200
$64,800
4
$64,800
$25,920
$38,880
5
$38,880
$23,880
$15,000 Salvage Value
Depreciation of radiology equipment:
Straight line depreciation of laboratory equipment = $800,000/7 = $114,286
Double-declining balance depreciation:
Year
Net Book Value - Beginning of Year
2 x SL rate x Beginning NBV
Net Book Value - End of year
1
$800,000
$228,571
$571,429
2
$571,429
$163,265
$408,163
3
$408,163
$116,618
$291,545
4
$291,545
$83,299
$208,247
5
$208,247
$59,499
$148,748
6
$148,748
$42,499
$106,248
7
$106,248
$26,248
$80,000 Salvage Value
Year
Net Book Value - Beginning of Year
2 x SL rate x Beginning NBV
Net Book Value - End of year
1
$300,000
$120,000
$180,000
2
$180,000
$72,000
$108,000
3
$108,000
$43,200
$64,800
4
$64,800
$25,920
$38,880
5
$38,880
$23,880
$15,000 Salvage Value
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