In: Accounting
1. A plant asset purchased for $725,000 has an estimated life of 10 years and a residual value of $36,250. Depreciation for the second year of use, determined by the declining-balance method at twice the straight-line rate is
2. A plant asset purchased for $638,000 at the beginning of the year has an estimated life of 5 years and a residual value of $58,000. Depreciation for the third year, determined by the sum-of-the-years'-digits method is $
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Answer:
1. Depreciation for the second year of use is $116000.
2. Depreciation for the third year is $116000.
3. The gain on the disposal is $29000.
Explanation:
1)
Computation of Depreciation Expense using Double Declining Balance methods:
Depreciation Expense = Cost of asset x Double declining Rate
Double declining Rate = (100/ Useful life) x 2 = (100 / 10) x 2 = 20%
Depreciation Expense for year 1 = $725000 x 20% = $145000
Depreciation Expense for Year 2 = ($725000 - $145000) x 20% = $116000
2)
Computation of Depreciation Expense using sum of year digit methods:
Depreciation Expense = (Cost of asset - Salvage Value) x Remaining life of asset / Sum of year digit
Sum of year digit = n(n+1) / 2 = 5(5+1) /2 = 15
Depreciation Expense for third year = ($638000 - $58000) x 3/15 = $580000 x 0.2 = $116000
3)
Computation of gain or loss on disposal of asset:
Cost of Asset = $783000
residual value = $130500
Depreciation expense = (Cost of asset - residual value) / useful life
= ($783000 - $130500) / 5 = $130500
Accumulated Depreciation in second year = $130500 x 2 = $261000
Book value at the time of sale = Cost of Asset - Accumulated Depreciation = $783000 - $261000 = $522000
Gain on sale of plant = sale price - Book value
= $551000 - $522000 = $29000.