Question

20.       Lussier Company purchased a new computer for $175,000. It is estimated that the computer will have a $15,000 residual value at the end of its 5-year useful service life. The double diminishing-balance method of depreciation will be used.

Instructions

Prepare a depreciation schedule which shows the annual depreciation expense on the computer for its 5-year life.

Answer 1

Solution

Depreciation schedule-Double declining
Year	Beginning Book Value	Depreciation rate	Annual Depreciation expense	Accumulated Depreciation	Ending Book Value
1	$ 175,000	40.00%	$ 70,000	$ 70,000	$ 105,000
2	$ 105,000	40.00%	$ 42,000	$ 112,000	$ 63,000
3	$ 63,000	40.00%	$ 25,200	$ 137,200	$ 37,800
4	$ 37,800	40.00%	$ 15,120	$ 152,320	$ 22,680
5	$ 22,680	40.00%	$ 7,680	$ 160,000	$ 15,000

Working

Double declining Method
	Cost	$ 175,000
B	Residual Value	$ 15,000
C=A - B	Depreciable base	$ 160,000
D	Life [in years]	5
E=C/D	Annual SLM depreciation	$ 32,000
F=E/C	SLM Rate	20.00%
G=F x 2	DDB Rate	40.00%

It can be seen that in Double declining balance method depreciation expense in year 5 is not 40% because 40% depreciation would make ending book value lower than residual value so depreciation is limited to an amount which makes ending book value equal to residual value.