Question

Gent Manufacturing Company purchased Equipment for $950,000 on January 4, 2015. The Equipment has an estimated useful life of five years and an estimated residual value of $60,000. The Equipment, which should last 50,000 hours, was operated 9,000 hours in 1; 8,500 hours in year 2; 12,000 in year 3; 10,500 in year 4; and 10,000 in year 5.

1. Computer the annual depreciation each year assuming the following depreciation methods: straight-line and double declining balance.

2. A) If the Equipment is sold for $300,000 after year 3, what would be the amount of gain or loss under the double-declining balance method?

B) f the Equipment is sold for $300,000 after year 3, what would be the amount of gain or loss under the straight line method?

Answer 1

1) Annual Depreciation under Straight line = (Cost - Residual Value)/Useful Life

= ($950,000 - $60,000)/5 yrs = $178,000 each year

Depreciation rate under double declining method = (1/Useful life)*2

= (1/5 yrs)*2 = 0.40 or 40%

Table showing Depreciation under Double declining balance method (Amts in $)

Year	Opening Balance of Equipment (A)	Depreciation Expense (B) (A*40%)	Closing Balance (A-B)
1	950,000	380,000	570,000
2	570,000	228,000	342,000
3	342,000	136,800	205,200
4	205,200	82,080	123,120
5	123,120	49,248	73,872

2) A) The book value of equipment at the end of year 3 is $205,200 under double declining balance method. Therefore if the equipment is sold for $300,000 after 3 years, then there will be a gain of $94,800 ($300,000 - $205,200).

B) Depreciation charged upto year 3 under straight line = $178,000*3 = $534,000

Book value at the end of year 3 = $950,000 - $534,000 = $416,000

Loss on sale of equipment = Sale Value - Book Value

= $300,000 - $416,000 = -$116,000

The amount of loss on sale of equipment will be $116,000 under straight line method.