Question

At the beginning of 2014, Robotics Inc. acquired a manufacturing facility for $12.6 million. $9.6 million of the purchase price was allocated to the building. Depreciation for 2014 and 2015 was calculated using the straight-line method, a 25-year useful life, and a $1.6 million residual value. In 2016 the company switched to the double-declining-balance depreciation method.

What is depreciation on the building for 2016? (Do not round intermediate calculations. Enter your answer in whole dollars.)

Answer 1

1. Rate of depreciation under straight line method

= (1/estimated life of asset) x 100 = (1/25) x 100 = 4%

2. Carrying amount of building at the date of change: -

Change in depreciation is made after two years so we will depreciate the asset for two years and it was on straight line method.

Per year depreciation = (Cost of asset- residual value)/estimated useful life of asset

                                      = ($9.6m - $1.6m)/25 OR ($9.6m - $1.6m) x 4%

                                      = $0.32m

Hence, Depreciation for year 2014 and 2015 = $0.32m x 2 = $0.64m

Carrying amount at end of 2015 = $9.6m - $0.64m = $8.96m

3. Rate of depreciation under double declining balance method = 4% x 2 = 8%

This depreciation percent is levied on carrying value of asset instead of original cost of asset as in case of straight line method.

4. Carrying amount at the date of change = $8.96m

New basis of depreciation = double declining balance method @ 8%

Depreciation for the year 2016 will be calculated as follows:

$8.96m x 0.08 = $0.7168m = 716800