Depreciation by Two Methods A Kubota tractor acquired on January 9 at a cost of

Question

Depreciation by Two Methods A Kubota tractor acquired on January 9 at a cost of $72,000 has an estimated useful life of ten years. Assuming that it will have no residual value. a. Determine the depreciation for each of the first two years by the straight-line method. First Year Second Year b. Determine the depreciation for each of the first two years by the double-declining-balance method. Do not round the double-declining balance rate. If required, round your final answer to the nearest dollar. First Year Second Year

Explanation / Answer

Question no. 1

Cost of the Tractor = 72000

Estimated useful life = 10 years

Scrap Value = 0

Straight line method = (Cost of Asset – Residual value) / useful life

=(72000 – 0 )/10 = 7200

Depreciation by Straight line Method

First year = 7200

Second year = 7200

Double declining balance method :

Straight line depreciation rate = 100 / useful life = 100/ 10 = 10%

Double declining depreciation rate = 10% * 2 = 20%

Depreciation for first year = 72000 * 20% = 14400

Depreciation for Second year =( 72000 – 14400)*20% = 11520

Question no. 2

a)

Cost of storage tank = 144000

Estimated residual value = 8000

Estimated useful life = 20 years

Annual depreciation by the straight line method =

(Cost of storage tank - Estimated residual value)/ Estimated useful life

= (144000 – 8000)/20 = 6800

b)

Straight line depreciation rate = 100/useful life = 100/20 = 5%

Double declining balance rate = 5%*2 = 10%

Depreciation for Year 1 = Cost of storage tank * Double declining balance rate

= 144000*10% = 14400

Net book value at year 1 = Cost of storage tank - Depreciation for Year 1

= 144000 – 14400 = 129600

Depreciation for Year 2 = Net book value at year 1 * Double declining balance rate

= 129600*10% = 12960

Question no. 3

1)

Cost price of Equipment = 272000

Useful life = 4 years

Operating hours = 9600

Scrap value = 22400

Equipment was used in :

1st year = 3600 hrs

2nd year = 3000 hrs

3rd year = 1700 hrs

4th year = 1300 hrs

Depreciation Expense :

Straight line method:

Straight line method = ( Cost of asset – Residual value) / useful life

= (272000 – 22400) / 4 = 62400

1st year = 62400

2nd year = 62400

3rd year = 62400

4th year = 62400

Total = 249600

Units of output method:

Units of output method =

(Cost of asset – Residual value) *Equipment operated in Year/Total operating hours

1st year = (272000 – 22400)*3600/9600 = 249600*0.375 = 93600

2nd year = (272000 – 22400)*3000/9600 = 249600*0.3125 = 78000

3rd year = (272000 – 22400)*1700/9600 = 249600*0.1771 = 44204.16

4th year = (272000 – 22400)*1300/9600 = 249600*0.1354 = 33795.84

Total = 249600

Double declining balance method :

Straight line depreciation rate = 100 / useful life = 100/ 4 = 25%

Double declining depreciation rate = 25% * 2 = 50%

1st year = 272000*50% = 136000

Net book value at the year 1 end = 272000 – 136000 = 136000

2nd year = (272000-136000) * 50% = 68000

Net book value at the year 2 end = 136000 - 68000 = 68000

3rd year = (136000- 68000) * 50% = 34000

Net book value at the year 3 end = 68000 - 34000 = 34000

4th year = Net book value at the year 3 end – Residual value

= 34000 – 22400 = 11600

Total = 249600

2)

Double declining balance method yields the highest depreciation expense for year 1.

3)

All methods yield the same depreciation over the four year life of the equipment.

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