Question

Computing Straight-Line and Double-Declining-Balance Depreciation

On January 2, Haskins Company purchases a laser cutting machine for use in fabrication of a part for one of its key products. The machine cost $112,000, and its estimated useful life is five years, after which the expected salvage value is $7,000. Compute depreciation expense for each year of the machine's useful life under each of the following depreciation methods:

Note: Round answers to the nearest whole number, when applicable.

a. Straight-line

Year 1
Year 2
Year 3
Year 4
Year 5

b. Double-declining-balance

Year 1
Year 2
Year 3
Year 4
Year 5

Answer 1

Here for the convenience of calculation, even the assets is purchased on 2nd of jan, the entire year depreciation is charged, not considering 1 day impact of it . However if student is not satisfied can comment i will update the answer. So full month convention is taken here.

A) Under straight line method depreciation the depreciation amount is same for all the year, it can change if the period is less than 1 year. The striaght line depreciation is charged on the Original cost of the assets every year.

In the given case, the original cost of the assets = $ 112000 and salvage value being = $ 7000 , wiith useful life = 5 years.

Depreciation under striaght line method every year = ( Cost - Salvage value) / useful life.

Depreciation Under Straight line method = ( 112000 - 7000 ) / 5 = $ 21000 each year.

Thus Depreciation under striaght line :

Year 1	$21,000
Year 2	$21,000
Year 3	$21,000
Year 4	$21,000
Year 5	$21,000

B) Double Declining balance method of depreciation assumes higher depreciation at recent years of assets acquition due to higher usage when asset is new. Further the rate of depreciation is double of straight line method and the depreciation every year is calculated on revised value of asset cost. This revised value is cost - accumulated depreciation till date.

Double declining balance depreciation rate = (1 / useful life )* 2 = ( 1/5 ) *2 = 40%

Year 1 depreciation = Cost * rate of depreciation = $ 112000 * 40% = $ 44800.

so revised value for year 2 depreciation = Cost - depreciation = $ 112000 - 44800 = $ 67200.

year 2 depreciation = Revised value * depreciation rate = $ 67200 * 40% = $ 26880.

So revised value for year 3 depreciation = value at end of year 1 - depreciation for year 2 = $ 67200 - 26880 = $ 40320.

Year 3 depreciation = Revised value * depreciation rate = $ 40320 * 40% = $ 16128

Revised value = $ 40320 - 16128 = $ 24192

Year 4 depreciation = $ 24192 * 40% = $ 9677

Revised value = $ 24192 - 9677 = $ 14515

Year 5 depreciation = $ 14515 * 40% = $ 5806.

Value at the end of the year 5 = $ 14515 - 5806 = $ 8709 , which is still abve the salvage value.

Year 1	$44,800
Year 2	$26,880
Year 3	$16,128
Year 4	$9,677
Year 5	$5,806