Question

Brandon Office Service purchased a new computer system on January 1, Year XXX1. Relevant data for the computer system is given below:

Purchase price

$36,200

Useful service life in years

5

Salvage value at the end of useful life

$3,400

Required:

a) Calculate the depreciation expense for each of the 5 years, assuming the use of straight line depreciation. Also, calculate the net book value of the asset and the accumulated depreciation expense for this asset at the end of Year XXX3 (2+1+1 = 4 points).

b) Calculate the depreciation expense for each of the 5 years, assuming the use of double-declining-balancedepreciation. Also, calculate the net book value of the asset and the accumulated depreciation expense for this asset at the end of Year XXX3 (3+1+1=5 points).

c) Suppose Brandon sold the computer system at the end of the fourth year (i.e. Year XXX4) for $19,000. Compute the amount of gain or loss using (i) straight line depreciation as well as (ii) double-declining-balance depreciation (1+1=2 points).

Answer 1

Answer:

(a)

Calculation of Depreciation using Straight line method :

Depreciation = ( Purchase Cost - Estimated Salvage Value ) / Estimated Useful life

= ( $ 36,200 - $ 3,400 ) / 5 years

= $ 6,560 per year

Thus, Depreciation expense per year is $ 6,560 using straight line method.

Calculation of net book value of the asset and the accumulated depreciation expense for this asset at the end of Year XXX3 (i.e after 3 years from purchase):

Accumulated Depreciation expenses at the end of year XXX3 = Deprecation expense per year * 3 years

= $ 6,560 * 3

= $ 19,680

Net book value of the asset at the end of year XXX3 = Purchase cost - Accumulated Depreciation expense at the end of year XXX3

= $ 36,200 - $ 19,680

= $ 16,520

(b)

Calculation of Depreciation using Double-declining balance method :

Year	Beginning Book Value	Rate (Working Note)	Depreciation Expense	Accumulated Depreciation	Ending book Value
(i)	(ii)	(iii)	(iv)[(ii)*(iii)]	(v)	(vi)[(ii)-(iv)]
XXX1	$ 36,200.000	40%	$ 14,480.000	$ 14,480.000	$           21,720.000
XXX2	$ 21,720.000	40%	$   8,688.000	$ 23,168.000	$           13,032.000
XXX3	$ 13,032.000	40%	$   5,212.800	$ 28,380.800	$              7,819.200
XXX4	$   7,819.200	40%	$   3,127.680	$ 31,508.480	$              4,691.520
XXX5	$   4,691.520	27.53%	$   1,291.575	$ 32,800.055	$              3,399.945

Depreciation in XXX5 year is the balancing figure, Difference between beginning book value of XXX5 & Salvage value ( $ 4,692 - $ 3,400 ). If we have calculated depreciation using 40% rate then ending book value will have lower than salvage value. And as per the provision Ending book value of the asset never been less than salvage value. We can say that, We can maximum depreciate asset Purchase cost less of salvage value.

As per above table,

Net book value of the asset at the end of Year XXX3	$   7,819.20
Accumulated Depreciation expense at the end of Year XXX3	$ 28,380.80

Working Note:

Calculation of Depreciation rate under Double decline balance method is as follows:

In Double Declining Balance method, Rate of Depreciation = 2 * Depreciation rate

= 2 * 20

= 40%

Depreciation Rate = (1 / Estimated Useful life) * 100

= ( 1/ 5 ) * 100

= 20 % per year

( c )

(i) Computation of gain or loss on sold of asset at end of year XXX4 for $ 19,000 (Straight line depreciation)

Gain or loss on sold of asset = Proceeds from asset sold - Net Book value of asset at end of year XXX4

= $ 19,000 - $ 9,960

= $ 9,040

Thus, Gain on sold of asset is $ 9040.

Working note:

Net book value of the asset at the end of year XXX4 = Purchase cost - Accumulated Depreciation expense at the end of year XXX4

= $ 36,200 - $ 26,240

= $ 9,960

Accumulated Depreciation expenses at the end of year XXX4 = Deprecation expense per year * 4 years

= $ 6,560 * 4

= $ 26,240

(ii) Computation of gain or loss on sold of asset at end of year XXX4 for $ 19,000 (double-declining-balance depreciation)

Gain or loss on sold of asset = Proceeds from asset sold - Net Book value of asset at end of year XXX4

= $ 19,000 - $ 4691.520

= $ 14,308.48

Thus, Gain on sold of asset is $ 14,308.48

Note: All answers are not rounded off to nearest dollar as there was no specific requirement.