Question

Millco, Inc., acquired a machine that cost $600,000 early in 2016. The machine is expected to last for eighth years, and its estimated salvage value at the end of its life is $80,000.

Required:

a. Using straight-line depreciation, calculate the depreciation expense to be recognized in the first year of the machine's life and calculate the accumulated depreciation after the fifth year of the machine's life.

b. Using declining-balance depreciation at twice the straight-line rate, calculate the depreciation expense for the third year of the machine's life.

c. What will be the net book value of the machine at the end of its eighth year of use before it is disposed of, under each depreciation method?

Answer 1

Working note no 1 for Straight Line Depreciation

A	Cost	$    600,000.00
B	Residual Value	$      80,000.00
C=A - B	Depreciable base	$    520,000.00
D	Life [in years]	8
E=C/D	Annual SLM depreciation	$      65,000.00

Year	Book Value	Depreciation expense	Ending Book Value	Accumulated Depreciation
1	$   600,000.00	$      65,000.00	$   535,000.00	$     65,000.00
2	$   535,000.00	$      65,000.00	$   470,000.00	$   130,000.00
3	$   470,000.00	$      65,000.00	$   405,000.00	$   195,000.00
4	$   405,000.00	$      65,000.00	$   340,000.00	$   260,000.00
5	$   340,000.00	$      65,000.00	$   275,000.00	$   325,000.00
6	$   275,000.00	$      65,000.00	$   210,000.00	$   390,000.00
7	$   210,000.00	$      65,000.00	$   145,000.00	$   455,000.00
8	$   145,000.00	$      65,000.00	$     80,000.00	$   520,000.00

Working Note no 2 for Double Declining Balance method

A	Cost	$    600,000.00
B	Residual Value	$      80,000.00
C=A - B	Depreciable base	$    520,000.00
D	Life [in years]	8
E=C/D	Annual SLM depreciation	$      65,000.00
F=E/C	SLM Rate	12.50%
G=F x 2	DDB Rate	25.00%

Year	Beginning Book Value	Depreciation rate	Depreciation expense	Ending Book Value	Accumulated Depreciation
1	$   600,000.00	25.00%	$ 150,000.00	$ 450,000.00	$ 150,000.00
2	$   450,000.00	25.00%	$ 112,500.00	$ 337,500.00	$ 262,500.00
3	$   337,500.00	25.00%	$    84,375.00	$ 253,125.00	$ 346,875.00
4	$   253,125.00	25.00%	$    63,281.25	$ 189,843.75	$ 410,156.25
5	$   189,843.75	25.00%	$    47,460.94	$ 142,382.81	$ 457,617.19
6	$   142,382.81	25.00%	$    35,595.70	$ 106,787.11	$ 493,212.89
7	$   106,787.11	25.00%	$    26,696.78	$   80,090.33	$ 519,909.67
8	$     80,090.33	25.00%	$    90.33*	$   80,000.00	$ 520,000.00

*In year 8 Depreciation will be an amount which makes book value to be equal to Residual value.

Requirement a)

Depreciation expense (Using SLM) to be recognized in Year 1 = $ 65000.    (See working note 1)

Accumulated depreciation after 5^TH year of Machine’s Life (Using SLM) = $ 325,000. (See working note 1)

Requirement b)

Depreciation Expense for the Third year of Depreciation (Using DDB) = $84,375.     (See working note 2)

Requirement c)

The book value under both methods will be equal to salvage value of the asset that is $ 80,000.

At the end of 8^th year the life of asset will be complete and all the depreciation associated with the asset will be equal to Cost minus Salvage value of Asset and Book value will be nothing more than salvage value. See the working note 1 and 2 for better understanding.

	SLM	DDB
Cost	$ 600,000.00	$           600,000.00
Total Accumulated depreciation	$ 520,000.00	$           520,000.00
Book Value	$     80,000.00	$             80,000.00