Question

In: Economics

BCK company purchased new equipment with an estimated useful life of four years. The cost of...

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?

Solutions

Expert Solution

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


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