Question

On January 1, X Company, purchased a machine for its employee cafeteria. The cost was $220,000 and it had a five- year estimated useful life and a $20,000 residual value. X Company uses the double-declining balance depreciation method. At the end of year three, X Company sold the machine for $50,000 because employee productivity had declined significantly.

(a) Prepare a depreciation table for the machine’s five-year life.

(b) What is the impact on X Company's financial statements from selling the machine?

Answer 1

Answer:-a)-

X Company
Depreciation Schedule-Double Declining Balance Method
YEAR	COST $	Depreciation Rate	Depreciation $	Accumulated Depreciation $	Book Value $
1	220000	40%	88000	88000	132000
2		40%	52800	140800	79200
3		40%	31680	172480	47520
4		40%	19008	191488	28512
5		40%	8512	200000	20000(salvage value)

Explanation:-

Double Declining balance depreciation is calculated using the following formula:

Depreciation = Depreciation Rate * Book Value of Asset

Depreciation rate is given by the following formula:

Depreciation Rate = Accelerator *Straight Line Rate

Straight-line Depreciation Rate = 1/2 = 0.20 = 20%
Declining Balance Rate = 2*20% = 40%

b)-Machine resale value at the end of three year =$50000

Machine book value at the end of three year =$47520

Loss on sale of asset =$47520-$50000 =$2480

The X Company incurred a loss of $2480 on sale of machine, hence it will reduce the company net income.