Question

Jorgenson Corporation started business on January 1 with the following long-lived fixed assets:

•	A 20,000 square foot office building purchased for $2.4 million, having an expected useful life of 20 years and a residual value of $200,000
•	24 desktop workstations costing $1,500 each, with an expected useful life of three years and no salvage value
•	Five automobiles costing $22,000 each, with an expected useful life of five years and a salvage value of $3,000 each

A.	Calculate the depreciation expense for each of the long-lived fixed assets for Years 1 and 2 using the straight-line depreciation method.
B.	Calculate the depreciation expense for each of the long-lived fixed assets for Years 1 and 2 using the double-declining balance method.
C.	Determine the net book value for each long-lived fixed asset at the end of Year 2 using:

i.

straight-line depreciation

	ii.		double-declining-balance
D.	Which type of depreciation would the firm prefer to use for financial reporting purposes? For tax purposes?

Answer 1

A. Straight-line Depreciation : ( Cost - Salvage Value ) / Estimated Useful Life

Building :

Year 1 depreciation expense = $ ( 2,400,000 - 200,000 ) / 20 = $ 110,000.

Year 2 depreciation expense = $ 110,000.

Workstations:

Year 1 depreciation expense = $ ( 24 x 1,500 - 0 ) / 3 = $ 12,000.

Year 2 depreciation expense = $ 12,000.

Automobiles :

Year 1 depreciation expense = $ ( 22,000 x 5 - 3,000 x 5 ) / 5 = $ 19,000.

Year 2 depreciation expense = $ 19,000.

B: Double- declining depreciation :

Building:

Rate of depreciation = 100 / 20 * 2 = 10 %.

Year 1 depreciation expense= $ 2,400,000 x 10 % = $ 240,000.

Year 2 depreciation expense = $ ( 2,400,000 - 240,000) x 10 % = $ 216,000.

Workstations:

Rate of depreciation = 100 / 3 * 2 = 66.67 %

Year 1 depreciation expense = $ 36,000 x 66.67 % = $ 24,000.

Year 2 depreciation expense = $ ( 36,000 - 24,000) x 66.67 % = $ 8,000.

Automobiles:

Rate of depreciation = 100 / 5 * 2 = 40 %

Year 1 depreciation expense = $ 110,000 x 40% = $ 44,000.

Year 2 depreciation expense = $ ( 110,000 - 44,000) x 40 % = $ 26,400.

C.Book value at the end of year 2 :

Asset	i. Straight-line Method	ii. Double Declining Method
Building	$ 2,180,000	$ 1,944,000
Workstation	12,000	4,000
Automobiles	72,000	39,600

D. For financial reporting purposes, the company would prefer straight-line depreciation method.

For tax purposes, it would prefer the double declining depreciation method.