Start Again& Co. purchased a new piece of equipment for $240,000 on January 1, 2

Question

Start Again& Co. purchased a new piece of equipment for $240,000 on January 1, 2016. In addition to the purchase price of $240,000, the company also paid $10,000 to have the equipment delivered and S50,000 to have it installed. Start Again &Co.; estimates the equipment to have a useful life of 4 years and that they will be able to sell it for $45,000 at the end of the fourth year. Based on the given information, please compute the depreciation expense for year 3 (2018) under 1) straight-line, 2) sum-of-the-years' digits, and 3) double- declining balance methods. 6.

Explanation / Answer

Depreciation Expense for year 3(2018) under:

Working Notes:

1.Calculation of depreciation using straight line method

As per straight line method depreciation expense=$300000-$45000/4 years=$ 63750

2.Calculation of depreciation using sum -of –the-years’ digits method

Cost of the asset   =$ (240000+10000+50000)=$ 3,00,000

Salvage value =$ 45,000

Useful life=4 years

Sum of the years digits=1+2+3+4=10

Depreciable base= $ 3,00,000-$ 45,000= $2,55,000

Year

Depreciable

Base (A)

Depreciation

Factor(B)

Depreciation

Expense(C=A*B)

1

$ 255000

4/10

$ 102000

2

$ 255000

3/10

$ 76500

3

$ 255000

2/10

$ 51000

4

$ 255000

1/10

$ 25500

3.Calculation of depreciation using Double Declining Balance method

Cost of the asset   =$ (240000+10000+50000)=$ 3,00,000

Salvage value =$ 45,000

Useful life=4 years

As per straight line method depreciation expense=$300000-$45000/4 years=$ 63750

i.e= 25%. Therefore rate of depreciation as per double declining method=50%

Year

Applicable

Percentage

Dep rate

Starting

Carrying

Value

Depreciation

Expense

Ending

Carrying

Value

1

50%

$300,000

$ 150000

$150000

2

50%

$150000

$ 75000

$ 75000

3

50%

$ 75000

$ 30000(depreciation

Would only be allowed

Up to the point where the

Book value=salvage value.

Thus depreciation

Allowed=$75000-$45000

=$30000

$ 45000

4

Year

Depreciable

Base (A)

Depreciation

Factor(B)

Depreciation

Expense(C=A*B)

1

$ 255000

4/10

$ 102000

2

$ 255000

3/10

$ 76500

3

$ 255000

2/10

$ 51000

4

$ 255000

1/10

$ 25500

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