Question

BCK company purchased new equipment with an estimated useful life of four years. The cost of the equipment was $50,000, and the salvage value was estimated to be $5,000 at the end of four years. The company uses the double-declining-balance method for book depreciation. (i) What is the amount of depreciation for the fourth year of use? (ii) What is the book value of the asset at the end of the third year?

Answer 1

Double declining balance method of depreciation is a form of accelerated depreciation which means that an asset will be depreciated twice faster than it would under the straight line depreciation method.

Cost of equipment	a	$50000
Useful life in years	b	4
Salvage value	c	$5000
Depreciable value	d=a-c	$45000
Depreciation expense (in straight line method)	e=d/b	$11250
Straight line depreciation rate	f=e/d	25%
Double declining balance depreciation rate	g=f*2	50%
Workings
Equipment book value at the beginning	a	50,000
Equipment book value at the end of 1st year	i=a-h	25,000	Depreciation for 1st year	h=a*g	25,000
Equipment book value at the end of 2nd year	k=i-j	12,500	Depreciation for 2nd year	j=i*g	12,500
Equipment book value at the end of 3rd year	m=k-l	6,250	Depreciation for 3rd year	l=k*g	6,250
Equipment book value at the end of 4th year	o=m-n	5,000	Depreciation for 4th year	n=m*g	1,250

Since, depreciation for 4^th year comes to be $3125 which results in a salvage value of $3125 i.e. less than $5000, depreciation for the 4^th year is restricted to $1250.

(i) What is the amount of depreciation for the fourth year of use? : 1250

ii) What is the book value of the asset at the end of the third year? : 6250