Question

A. Assume you own the machinery above. Calculate the annual depreciation expense using the straight-line method. Assume all machinery is bought at the first of the year.                                                                                       

Machine                                  Cost                 Salvage Value             Useful Life

1) Tractor A                            50,000                20,000                                  5

2) Tractor B                             60,000                  0                                         7

B. Calculate the double-declining annual depreciate expense for each tractor.

Calculate years 1 through 7 for both A and B.

Answer 1

A. Straight line method:-

Depreciation per year = (Cost - Scrap value) ÷ Useful life

Depreciation per year of Tractor A = (50,000-20,000)÷5 = 30,000÷5 = $6,000

Depreciation per year of Tractor B = (60,000-0)÷7 = 60,000÷7 = $8,571

Depreciation under straight line

Year	Tractor A	Tractor B
1	$6,000	$8,571
2	6,000	8,571
3	6,000	8,571
4	6,000	8,571
5	6,000	8,571
6		8,571
7		8,571

B. Double declining method:-

Depreciation rate under straight line = 1÷ Useful life × 100

Depreciation rate under double declining method = 2× Depreciation rate under straighter line

Tractor A:-

Depreciation rate under straight line = 1÷5×100 = 20%

Depreciation rate under double declining method = 2×20% = 40%

Tractor A

Year	Beginning Balance	Depreciation expense	Ending Balance
1	$50,000	50,000×40% = $20,000	50,000-20,000 = $30,000
2	30,000	30,000×40% = 12,000	30,000-12,000 = 18,000
3	18,000	18,000×40% = 7,200	18,000-7,200 = 10,800
4	10,800	10,800×40% = 4,320	10,800-4,320 = 6,480
5	6,480	6,480×40% = 2,592	6,480-2,592 = 3,888

Tractor B:-

Depreciation rate under straight line = 1÷7×100 = 14.29%

Depreciation rate under double declining method = 2×14.29% = 28.58%

Tractor B

Year	Beginning balance	Depreciation expense	Ending balance
1	$60,000	60,000×28.58% = $17,148	60,000-17,148 = $42,852
2	42,852	42,852×28.58% = 12,247	42,852-12,247 = 30,605
3	30,605	30,605×28.58% = 8,747	30,605-8,747 = 21,858
4	21,858	21,858×28.58% = 6,247	21,858-6,247 = 15,611
5	15,611	15,611×28.58% = 4,462	15,611-4,462 = 11,149
6	11,149	11,149×28.58% = 3,186	11,149-3,186 = 7,963
7	7,963	7,963×28.58% = 2,276	7,963-2,276 = 5,687