Question

Freedom Co. purchased a new machine on July 2, 2016, at a total installed cost of $43,000. The machine has an estimated life of five years and an estimated salvage value of $6,700.

Required:

a-1. Calculate the depreciation expense for each year of the asset's life using Straight-line depreciation.

	Year Depreciation Expense 1 2 3 4 5

a-2. Calculate the depreciation expense for each year of the asset's life using Double-declining-balance depreciation.

	Year Depreciation Expense 1 2 3 4 5

b. How much depreciation expense should be recorded by Freedom Co. for its fiscal year ended December 31, 2016, under each method? (Note: The machine will have been used for one-half of its first year of life.)

	Depreciation Expense Straight‑line Double-declining balance

c. Calculate the accumulated depreciation and net book value of the machine at December 31, 2017, under each method.

	Cost Accumulated Depreciation Net Book Value Straight‑line $43,000 Double-declining‑balance 43,000

Answer 1

a1)

Annual depreciation = (Cost price - Residual value)/Useful life

= (43,000 - 6,700)/5

= 36,300/5

= $7,260

Depreciation expense for year 1 = 7,260 x 6/12

= $3,630

Year	Depreciation expense
1	3,630
2	7,260
3	7,260
4	7,260
5	7,260

a2)

Double declining depreciation rate = 2 x 1/Useful life

= 2 x 1/5

= 40%

Depreciation for year 1 = 43,000 x 40/100 x 6/12

= $8,600

Year	Depreciation expense	Accumulated depreciation
1	8,600	8,600
2	(43,000 - 8,600) x 40% = 13,760	22,360
3	(43,000 - 22,360) x 40% = 8,256	30,616
4	(43,000 - 30,616) x 40% = 4,954	35,570
5	730	36,300

Since residual value of machine is $6,700, hence accumulated depreciation on machine cannot exceed $36,300 i.e. its depreciable cost (43,000 - 6,700 = 36,300). Thus, depreciation in the 5th year would be = 36,300 - 35,570 = $730

b)

	Depreciation expense
Straight line	3,630
Double declining balance	8,600

c)

	Cost (i)	Accumulated depreciation (ii)	Net book value (i) - (ii)
Straight line	43,000	10,890	32,110
Double declining balance	43,000	22,360	20,640