Question

In: Accounting

On 1 January 2006, Norris Company purchased equipment for $42,000. Norris also paid $1,200 for shipping...

On 1 January 2006, Norris Company purchased equipment for $42,000. Norris also paid $1,200 for shipping and installation. The equipment is expected to have a useful life of 10 years and a salvage value of $3,200.

  1. (a) Calculate the depreciation expense for the years 2006 through 2008, using the straight-line method.

  2. (b) Calculate the depreciation expense for the years 2006 through 2008, using the double- declining balance method.

  3. (c) What is the book value of the equipment at the end of 2008 under each method?

You are required to show your workings clearly.

Solutions

Expert Solution

Answer-a)- Depreciation expense- Year 2006 = $4000.

Year 2007 = $4000.

Year 2008 = $4000.

Explanation- Straight line Method- Annual Depreciation expense

= (Cost of asset- Salvage value of asset)/No. of useful life (years)

= ($43200 - $3200)/10 years

= $40000/10 years

= $4000

Where- Cost of equipment = Purchase price of equipment+ Shipping & installation

= $42000+$1200

= $43200

b)- Depreciation expense- Year 2006 = $8640.

Year 2007 = $6912.

Year 2008 = $5530.

Explanation- Double Declining balance depreciation is calculated using the following formula=

Depreciation = Depreciation Rate * Book Value of Asset

Depreciation rate is given by the following formula:

Depreciation Rate = Accelerator *Straight Line Rate

Straight-line Depreciation Rate = 1/10 = 0.10 = 10%
Declining Balance Rate = 2*10% = 20%

Depreciation for Year 2006 = $43200*20% = $8640

Book value at the end of Year 2006 = $43200 - $8640 = $34560

Depreciation for Year 2007 = $34560*20% = $6912

Book value at the end of Year 2007 =$34560 - $6912 = $27648

Depreciation for Year 2008 = $27648*20% = $5530

Book value at the end of Year 2008 = $27648 - $5530 = $22118

Where- Cost of equipment = Purchase price of equipment+ Shipping & installation

= $42000+$1200

= $43200

c)- Book value of the equipment at the end of 2008 under straight line method = Cost of equipment –Accumulated depreciation on Year 2008

= $43200 - $12000

= $31200

Book value of the equipment at the end of 2008 under Double Declining balance method = $22118

ekkarill92 answered 2 years ago
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