Computing Straight-Line and Double-Declining-Balance Depreciation On January 2,

Question

Computing Straight-Line and Double-Declining-Balance Depreciation On January 2, Haskins Company purchases a laser cutting machine for use in fabrication of a part for one of its key products. The machine cost $90,000, and its estimated useful life is five years, after which the expected salvage value is $5,000. For both parts (a) and (b) below: (1) Compute depreciation expense for each year of the machine's five-year useful life under that depreciation method. (2) Use the financial statements effects template to show the effect of depreciation for the first year only for that method.

Explanation / Answer

Question 1). Solution :- Straight line depreciation method :-

Depreciation amount for each of the five year (Year 1 to Year 5) = (90000 - 5000) / 5

= 85000 / 5

= $ 17,000.

Double declining balance method :-

Depreciation rate in straight line depreciation method = 1 / Estimated useful life of machine.

= 1 / 5

= 0.20 i.e., 20 %

Accordingly, Depreciation rate in double declining balance method = Twice of the straight line depreciation rate.

= 2 * 20 %

= 40 %

Depreciation schedule (Double declining balance method)

Conclusion :-

Question 2). Answer :- Analysis of effect of depreciation for the first year only :-

Straight line depreciation method :-

a). Income statement :- Net income for first year will reduce / decrease by $ 17,000.

b). Balance sheet :- Due to decrease in net income by $ 17000, Capital will decrease by $ 17000 and Asset (Machine) value will decrease by $ 17000 in year one.

Double declining balance method :-

a). Income statement :- Net income for first year will reduce / decrease by $ 36,000.

b). Balance sheet :- Due to decrease in net income by $ 36000, Capital will decrease by $ 36000 and Asset (Machine) value will decrease by $ 36000 in the year one.

Year end Depreciation amount Book value 1 36000 (90000 * 40 %) 54000 (90000 - 36000) 2 21600 (54000 * 40 %) 32400 (54000 - 21600) 3 12960 (32400 * 40 %) 19440 (32400 - 12960) 4 7776 (19440 * 40 %) 11664 (19440 - 7776) 5 6664 (11664 - 5000)   5000

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