Question

Gandolfi Construction Co. purchased a used CAT 336DL earth mover at a cost of $405,000 in January 2016. The company’s estimated useful life of this heavy equipment is 10 years, and the estimated salvage value is $83,000. Required: a. Using straight-line depreciation, calculate the depreciation expense to be recognized for 2016, the first year of the equipment’s life, and calculate the equipment’s net book value at December 31, 2018, after the third year of the equipment’s life. b. Using declining-balance depreciation at twice the straight-line rate, calculate the depreciation expense to be recognized for 2018, the third year of the equipment’s life.

Answer 1

Information in the question

Gandolfi Construction Co.

Purchased used CAT 336 DL earth mover at a cost of $405,000 in January 2016.

Estimated useful life 10 years

Estimated salvage value $83,000

1. Using straight line method, calculate the depreciation expense for 2016.
2. Calculate the equipment’s net book value at December 31, 2018
3. Using declining balance depreciation at twice the straight line rate, calculate the depreciation expense for 2018.

Question 1:Using straight line method, calculate the depreciation expense for 2016.

Calculation of Depreciation under straight line method for 2016(the first year)

Depreciation      = (Original cost of the asset – estimated salvage value) / estimated useful life

                                = 405,000 – 83000 / 10 = 32,200

                                Depreciation for the year 2016 under Straight line method =$32,200

Question 2. Calculate the equipment’s net book value at December 31, 2018 under Straight Line Method

2016	Cost of the asset	405,000
	Less: Depreciation	32,200
2017	Book value at the beginning of the year	372,800
	Less: Depreciation	32,200
2018	Book value at the beginning of the year	340,600
	Depreciation	32,200
	Book value at the end of the year 2018	308,400

Book value at the end of the year 2018 = $ 308,400

Question 3: Using declining balance depreciation at twice the straight line rate, calculate the depreciation expense for 2018.

Step 1: Calculate depreciation under straight line method without considering salvage value

Depreciation      = Original cost of the Asset / Estimated useful life

                                = 405,000 / 10

                                =$ 40,500

Step2: Calculate percentage of Depreciation

Percentage of Depreciation        = Depreciation / Original cost of the asset x 100

                                                                = 40,500 / 405,000 x 100

                                                                = 10%

Step 3: Calculate Depreciation under Declining balance at twice the straight line rate

Depreciation = Book value at the beginning of the year x straight line rate of depreciation x 2

Depreciation for the year 2016

Book Value = 405,000

Depreciation = 405,000 x 10% x 2 = $81,000

Depreciation for the year 2017

Book Value = 405,000 – 81,000 = 324,000

Depreciation = 324,000 x 10% x 2 = $64,800

Depreciation for the year 2018

Book Value = 324,000 – 64800 = 259.200

Depreciation= 259,200 x 10% x 2 = $51,840

Depreciation for the year 2018 under Declining balance at twice the straight line rate = $51,840