Question

Conok Company has a fiscal year ending on Dec 31 each year. The company purchased (on April 1, 2015) equipment with a total cost of $500,000, estimated useful life of 10 years, and estimated salvage value of $70,000. On Jan 1, 2017, the company automated the equipment at a cost of $200,000 to facilitate 24 hours operations. This doubled production of the asset but the useful life was decreased by 4 years. Prepare a depreciation table to calculate the depreciation expense and the accumulated depreciation each year using the double declining balance method.

Depreciation Table 2017 to 2021

Answer 1

The double declining balance method has double the rate of straight line depreciation, here the useful life is 10 years at the time of purchase of equipment.

Thus Depreciation rate as per straight line basis = 1 / 10 = 10% per year, so double declining method depreciation rate will be 2* 10 % i.e 20%.

Now for 2015 , the assets is purchased on 1st april and assuming the year to be start and end from January to December , in 2015 only 9 months of depreciation will be calculated.

Further we know that in double declining balance method every year the depreciation rate is applied on the written down value of assets after reducing the accumulated depreciation from the cost.

2015 Depreciation = Value * Rate * 9 / 12 = $500,000 * 20 % * 9/12 = $ 75,000.

Thus at the end of 2015 , accumulated depreciation = $ 75,000 and thus balance of cost = $ 425000.

2016 Depreciation = Value * Rate *12/12 = $425000 * 20% * 12/12 = $ 85,000.

Thus at the end of 2016, accumulated depreciation = $ 160000 (75000 + 85000) and balance value = $ 340000.

Now on 1st january 2017 ,the company automated the equipment at a cost of $200,000 to facilitate 24 hours operations.which has doubled the production, so this cost will be capitalised as it enhances the capacity of the equipment ,

So the value of the machinery will rise by $ 200,000 making the depreciable value on 1st january 2017 be $ 540,000 ( 340000 +200000) .

Further the estimated useful life is changed as decreased by 4 years so depreciable useful life will be 6 years only, since the total life is 6 years out of which 1.75 years ( April 15 - Dec 16 have already expired , the remaining useful life be 4.25 years only, from Jan 2017 to March 2021.

So the depreciation will be for 4.25 years from jan 2017, so the rate will be =( 1/ 4.25 ) *2 = 47.06%

Here in the table the accumulated depreciation is calculated as summation from 2015.** (160000 + 254118)

Year	Book Value	Depreciation %	Depreciation Expense#	Accumulated Depreciation	Book Value year end
2017	$5,40,000	47.06%	$2,54,118	$4,14,118**	$2,85,882
2018	$2,85,882	47.06%	$1,34,533	$5,48,651	$1,51,349
2019	$1,51,349	47.06%	$71,223	$6,19,874	$80,126
2020	$80,126	47.06%	$37,706	$6,57,580	$42,420
2021	$42,420	11.76%	$4,991	$6,62,571	$37,429

Further the depreciation of 2021 is only for 3 months , thus the rate is reduced to 11.76 % ( 47.06 * 3/12).

Please note that the depreciation rate after the january is changed and its in decimal form as = 47.0588235% rounded off to 47.06% , it is due to the changes in estimated useful life, this answer is correct however some may argue that estmated life should be 6 years , after reducing the 4 years, however since its original purchase is of april and not january so the calculation becomes a bit typical.

# Depreciation expenses is rounded off..