Question

On April 1, 2011, Company A purchased equipment for $100,000. On the purchase, a sales tax of 15% is being paid. The equipment has defected, so a maintenance cost of $2000 is incurred for repairs. After the equipment arrives, the company must pay the transportation cost of $5000. The company also paid installation and testing costs of $20000. This equipment is estimated to have 5-year useful life. At the end of the 5th year, the salvage value (residual value) will be $20,000. Company A recognizes depreciation to the nearest whole month. Instructions:

Make a deprecation schedule

a. Using a double-declining balance depreciation method.

b. Using straight-line depreciation method.

Answer 1

Part (a)

Total cost of asset
Purchase price	$ 100000
Sales tax (15% on 100000)	$ 15000
Transportation cost	$ 5000
Installation & Testing	$ 20000
Total cost of asset to be capitalised	$ 140000
Repair cost cannot be capitalised,it is revenue expense in nature

Depreciation under double declaining method
Life of asset	5 years
Annual depreciation rate	100% / 5 years
	20% per year
Multiply this 20% to get double declaining rate
(2 x20%)	40%
Year	1	2	3	4	5
Book value	140000	84000	50400	30240
Annual depreciation 40%	56000	33600	20160	10240	0
Ending book value	84000	50400	30240	20000
Under double declaining method we need to find out depreciation untill salvage value ($ 20000) is reached

Part(b)

Depreciation under double declaining method
Life of asset	5 years
Cost of asset	$ 140000
Salvage value	$ 20000
Annual depreciation (140000-20000) / 5	$ 24000
Annual depreciation under straight line method is $ 24000 per year