Question

Crescent Textile Company has purchased a new generator whose market price is $15,000 but after a (10)
lot of negotiations the sellers agreed to offer it at $11,000 cash and a trade-in of company’s old generator
whose book value is $2,000. An additional $1,500 were spent on transportation and installation of the
generator at site. The expected useful life of the generator is 8 years, after which the salvage value is
estimated to be $800. Develop a table for the annual depreciation of the generator for each year of its life
if company follows 200% declining balance method with switch over to the straight-line method.

Answer 1

Depreciation of Crescent Textile Company under 200% declining balance method with switch over straight line method

Cost of generator = 11000 (cash) + 2000 (old generator) + 1500 (Installation cost) = $ 14,500.

Expected useful life = 8 years

Salvage Value = $800

Straight-line Depreciation Rate= 1/8 = 12.5%

200% Declining Balance Rate = 12.5%*200%= 25%

200% Declining Balance Depreciation Chart:

Year	Book Value at year start	Depreciation	Depreciation	Accumulated	Book Value at year end
1	$14,500	25.00%	$3,625	$3,625	$10,875
2	$10,875	25.00%	$2,719	$6,344	$8,156
3	$8,156	25.00%	$2,039	$8,383	$6,117
4	$6,117	25.00%	$1,529	$9,912	$4,588
5	$4,588	25.00%	$1,147	$11,059	$3,441
6	$3,441	25.00%	$860	$11,919	$2,581
7	$2,581	25.00%	$645	$12,564	$1,936
8	$1,936	25.00%	$484	$13,048	$1,452

Using Double-declining, our depreciation in year 6 as shown earlier was $860, but it will be more if we switch to the Straight-line method. When switching, the lifespan is the number of years left in the asset's original lifespan.

In year 6, our asset has a depreciable cost of $2,641 ($3,441-$800) and 3 remaining years of useful life. As we switch to Straight-line, the depreciation for the next 3 years is $2,641 ÷ 3, or $880. And our asset becomes fully depreciated with salvage value of $800.

Hence, final depreciation for 8 years are as follows:

Year	Depreciation Method	Depreciation
1	200% Declining Balance Rate	$3,625
2	200% Declining Balance Rate	$2,719
3	200% Declining Balance Rate	$2,039
4	200% Declining Balance Rate	$1,529
5	200% Declining Balance Rate	$1,147
6	Straight-line Depreciation	$880
7	Straight-line Depreciation	$880
8	Straight-line Depreciation	$880

Note: Switch to Straight-line depreciation in the year in which the amount of depreciation generated by Straight-line is greater than that of Double-declining balance in question it is 6th year.

Assumption: It is assumed that asset is purchased in begining of year.