Question

On January 1, Year 1, Dinwiddie Company purchased a car that cost $45,000. The car has an expected useful life of 5 years and a $10,000 salvage value. Which of the following statements is true?

a)The total amount of depreciation expense recognized over the five-year useful life will be greater under the double-declining-balance method than the straight-line method.

b)The amount of depreciation expense recognized in Year 4 would be greater if Dinwiddie depreciates the car under the straight-line method than if the double-declining-balance method is used.

c)At the end of Year 2, the amount in accumulated depreciation account will be less if the double-declining-balance method is used than it would be if the straight-line method is used.

d)None of these statements is true.

Answer 1

Statement “ b “ is TRUE

Reason: Depreciation rate under Double Declining Method=40%{ ( 100/5)*2}

Depreciation inYear1=0.4( 45000)=18000(Ending book value=27,000)

Depreciation inYear2=0.4(27000)=10800(Ending book value=16,200)

Depreciation in Year3= 6200 (If The depreciation is calculated as per above method it will decrease the book value of the asset below its estimated residual value . Therefore depreciation would only be allowed up to the point where book value equals the salvage value. Thus Depreciation Allowed = $16200 − $ 10,000= $6200

Therefore Depreciation under Double Declining Method in year 4= 0 as the asset is depreciated fully in the third year itself.

Depreciation under Straight Line Method for year 4 = $ 7000 {($ 45000-$ 10000)/5}

Therefore depreciation in year 4 would be greater if Dinwiddie depreciates the car under the Straight Line method than if the double declining balance method is used.