Question

E11.3  

(LO 1, 2 ) (Depreciation Computations—SYD, DDB—Partial Periods) Judds Company purchased a new plant asset on April 1, 2020, at a cost of $711,000. It was estimated to have a service life of 20 years and a salvage value of $60,000. Judds' accounting period is the calendar year.

Instructions

a.  

Compute the depreciation for this asset for 2020 and 2021 using the sum-of-the-years'-digits method.

b.  

Compute the depreciation for this asset for 2020 and 2021 using the double-declining-balance method.

Answer 1

a. Compute the depreciation for this asset for 2020 and 2021 using the sum-of-the-years'-digits method.

Answer:

Depreciation for 2020

46,500

Depreciation for 2021

59,675

Calculation

For the sum-of-the-years'-digits method, the depreciation is the calculated by depreciation cost multiplied with the fraction of useful life to Sum of Years digit.

Here the useful life is 20 years.

We need to first calculate the Sum of Years digit. That is

Sum of Years digit = (Useful life * (Useful life + 1)/2 = ( (20(20+1))/2 = 210

So to calculate for 2020, we need to calculate the depreciation cost. That is Cost of plant minus the salvage value.

Depreciation cost = 711,000 - 60,000 = 651,000

The new plant asset was purchased on April 1 2020, so the number of months, Judds Company will use that in 2020 will be from April 1, 2020 to Dec 31, 2020. That is 9 months out of 12 months in a year. i.e, 9/12 = 3/4

So the depreciation for this asset for 2020 = 3/4 * 20/210 * 651,000 = 46,500

Then we need to calculate the depreciation for 2021. Here, we need to do an adjustment, since the purchase of the asset was on April 2020, one year of purchase will only be completed in April 2021, so we need to calculate the depreciation for the first quarter of the 2021, with the life as 20 years.

So the depreciation for this asset for 2021

From Jan to March 2021 = 1/4 * 20/210 * 651,000 = 15,500

And one year since purchase is in April 2021, then the life becomes 20 - 1 = 19 years:

From April to Dec 2021 = 3/4* 19/210 * 651,000 = 44,175

Hence, the depreciation for this asset for 2020 = 15,500 + 44,175 = 59,675

b. Compute the depreciation for this asset for 2020 and 2021 using the double-declining-balance method?

Answer:

Depreciation for 2020

53,325

Depreciation for 2021

65,768

Calculation

Here, we need to calculate the depreciation using double-declining-balance method. It is also called as 200% declining balance method. We need to multiply the straight-line depreciation rate with 2 to get the Double-Declining Depreciation Rate. Hence first we need to find the Straight line depreciation rate.

To calculate the Straight line depreciation rate, we need to divide the 100% with the life of the asset. So here the life of asset is 20 years. So

Straight line depreciation rate = 100% / 20 years = 5%

Double-Declining Depreciation Rate = Straight line depreciation rate * 2 = 5% * 2 = 10%

The new plant asset was purchased on April 1 2020, so the number of months, Judds Company will use that in 2020 will be from April 1, 2020 to Dec 31, 2020. That is 9 months out of 12 months in a year. i.e, 9/12 = 3/4

Here we do not deduct the salvage value from cost, as the asset wont depreciate fully if salvage value is already deducted from original cost. So, we take the orginal cost of 711,000 here.

So the depreciation for this asset for 2020 = 3/4 * 10% * 711,000 = 53,325

And the depreciation for this asset for 2020 = 10% * (711,000 - 53,325) = 65,768