Question

Calculate the depreciation for the following scenarios. Bought a piece of equipment costing $30,000, with a salvage value of $10,000.

a) Figure the SL depreciation for year one and year two. Assuming a 10 year useful life.

b) Figure the units of production (activity) depreciation. Assuming that total units will be 100,000.

Year 1 – 20,000 units

   Year 2 - 30,000 units

c)Figure the double declining balance depreciation for year one and year two. Assuming a 4 year life.

d) Figure the SL depreciation; assuming a 10 year life; if the equipment was purchased on July 1^st.

e) Prepare the Journal Entry for a (SL Depreciation)

Answer 1

a) Under Straight line method of depreciation the salvage value of the asset is deducted from the cost of the asset. The arrived value is called as depreciable value of the asset. The depreciable value of the asset is divided by number of years of useful life to arrive at the depreciation to be charged per year.

The depreciation to be charged for Year 1 and Year 2 is calculated as below:

Cost of Equipment	$   30,000.00
Less: Salvage Value	$ (10,000.00)
Depreciable value of Equipment	$   20,000.00
Useful Life	10 Years
Depreciation for Year 1	20000/10
	$      2,000.00
Depreciation for Year 2	$      2,000.00

b) Under units of production method the purchase value reduced by it's salvage value is divided by the total number of units produced. This will give the depreciation for each production unit. The total depreciation for the year is calculated by multiplying the total number of units produced with the depreciation per unit of production.

Cost of Equipment	$   30,000.00
Less: Salvage Value	$ (10,000.00)
Depreciable value of Equipment	$   20,000.00
Total Number of units produced	100000
Depreciation per unit of production 20000/100000	$              0.20
No. of Units produced in Year 1	20,000
Depreciation for Year 1 20000 x 0.2	$      4,000.00
No. of Units produced in Year 2	30,000.00
Depreciation for Year 30000 x 0.2	$      6,000.00

c) Under double declining method of depreciation firstly the depreciation % per year under straight line method is calculated and it is multiplied by 2 to arrive at the % of depreciation to be charged per year on the book value of the asset. Under this method, the depreciation is calculated on the book value at the beginning of the year and the salvage value is not considered for calculation of the depreciation.

Cost of Equipment	$   30,000.00
Useful Life	4 Years
Depreciation for each year 30000/4	7500
% depreciation per year = (7500/30000)*100	25%
Therefore, Depreciation per year is 25% of cost of equipment
The depreciation % to be charged under double declining method would be 25% x 2 = 50%

d) As calculated earlier, the straight line depreciation per year is $2,000. However, in this instance the equipment was bought on 1st July. Therefore depreciation should be charged for 6 Months (1st July to 31st December). Therefore the depreciation for 1st Year as on 31st December would be $1000 (50% of $2,000)

e) Journal Entry for Straight line depreciation.

When a depreciation is charged, depreciation is an expense, hence depreciation expense account is debited and Accumulated depreciation account is credited. Accumulated depreciation is a contra asset account which will have a credit balance.

Journal entries: