A plant assets required at a total cost of $37,500 has an estimated scrap value

Question

A plant assets required at a total cost of $37,500 has an estimated scrap value of %2,500 and an anticipated useful life of 7 years. Determine: 1. The annual rate (expressed as a percentage or fraction) of depreciation using the straight-line-method. 2. The annual depreciation using the straight line method. 3. The first year's straight-line depreciation, assuming that the asset was acquired 3 months into the current accounting period. 4. Continuing with assumption (3), the value of the accumulated depreciation account after the second year's depreciation is recognized. 5. The residual value for the plant assets after the asset has been depreciated for 7 years. 6. Using the information presented at the beginning of the exercise 2, determine the five items assuming asset depreciation and using the double-declining method of recognizing depreciation. 7. Using the information presented at the beginning of the exercise 2, determine the five items assuming asset depreciation and using the sum of the years' digits method.

Explanation / Answer

Since, there are multiple sub-parts, the first five have been answered.

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Part 1)

The annual depreciation rate can be deteremined as follows:

Annual Depreciation as Per Straight Line Method = (Cost - Scrap)/Estimated Life*100 = (37,500 - 2,500)/7 = $5,000

The depreciation rate can be calculated as follows:

Depreciation Rate = Annual Depreciation as Per Straight Line Method/(Cost - Salvage Value)*100 = 5,000/(37,500 - 2,500)*100 = 14.29% (answer)

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Part 2)

The annual depreciation as per straight line method has been calculated as follows:

Annual Depreciation = (Cost - Salvage Value)*Depreciation Rate as Calculated in Part

Annual Depreciation as per Straight Line Method = (37,500 - 2,500)*14.29% = $5,000 (answer)

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Part 3)

The depreciation as per straight line method for 3 months can be calculated as follows:

Depreciation as Per Straight Line Method for 3 Months = Depreciation as Per Straight Line Method*3/12 = 5,000*3/12 = $1,250 (answer)
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Part 4)

Since, we are required to keep assmuption 3 under consideration, the total value of accumulated depreciation account after second year's depreciation is recognized can be determined as follows:

Balance in Accumulated Depreciation after Second Year = Year 1 Depreciation for 3 Months + Second Year Depreciation for Full Year = 1,250 + 5,000 = $6,250 (answer)

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Part 5)

If the asset is put to use at beginning of the first year, the residual value will be $2,500 (same as provided in the question)

If the asset is put to use for 3 months during the first year, the residual value will be (37,500 - 1,250 [Depreciation for Year 1] - 6*5,000 [Depreciation for 6 Years] ) = $6,250

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