Question

1. On January 1, a business purchases a piece of equipment and the following information applies:

Acquisition cost                   20,000

Estimated useful life                      10 years

Estimated total unit of production     12,000

Estimated salvage value                  2,000

      Actual units produced in year 1                 1,100

Actual units produced in year 2                 1,500

1. Determine depreciation expense for YEAR 2 under units of production.

2. Determine depreciation expense for YEAR 2 under double declining balance.

3. Without performing any calculations, what will be the book value of the equipment after it is fully depreciated under ANY depreciation method?

Answer 1

• Requirement A

A	Cost	$            20,000.00
B	Residual Value	$              2,000.00
C=A - B	Depreciable base	$            18,000.00
D	Usage	12,000
E = C/D	Depreciation per unit	$                    1.50

Depreciation Expense for Year 2 = 1500 units x $ 1.50 = $ 2,250 Answer

• Requirement B

A	Cost	$            20,000.00
B	Residual Value	$              2,000.00
C=A - B	Depreciable base	$            18,000.00
D	Life [in years]	10
E=C/D	Annual SLM depreciation	$              1,800.00
F=E/C	SLM Rate	10.00%
G=F x 2	DDB Rate	20.00%

Year	Beginning Book Value	Depreciation rate	Depreciation expense	Ending Book Value	Accumulated Depreciation
1	$              20,000.00	20.00%	$            4,000.00	$             16,000.00	$           4,000.00
2	$              16,000.00	20.00%	$            3,200.00	$             12,800.00	$           7,200.00

--Depreciation expense for Year 2 = $ 3,200 Answer

• Requirement C

Book value after its fully depreciated = $ 2,000 (which will be equal to the Salvage value)