Gandolfi Construction Co. purchased a used CAT 336DL earth mover at a cost of $4
ID: 2538485 • Letter: G
Question
Gandolfi Construction Co. purchased a used CAT 336DL earth mover at a cost of $405,000 in January 2016. The company’s estimated useful life of this heavy equipment is 10 years, and the estimated salvage value is $83,000. Required: a. Using straight-line depreciation, calculate the depreciation expense to be recognized for 2016, the first year of the equipment’s life, and calculate the equipment’s net book value at December 31, 2018, after the third year of the equipment’s life. b. Using declining-balance depreciation at twice the straight-line rate, calculate the depreciation expense to be recognized for 2018, the third year of the equipment’s life.
Explanation / Answer
Information in the question
Gandolfi Construction Co.
Purchased used CAT 336 DL earth mover at a cost of $405,000 in January 2016.
Estimated useful life 10 years
Estimated salvage value $83,000
Question 1:Using straight line method, calculate the depreciation expense for 2016.
Calculation of Depreciation under straight line method for 2016(the first year)
Depreciation = (Original cost of the asset – estimated salvage value) / estimated useful life
= 405,000 – 83000 / 10 = 32,200
Depreciation for the year 2016 under Straight line method =$32,200
Question 2. Calculate the equipment’s net book value at December 31, 2018 under Straight Line Method
2016
Cost of the asset
405,000
Less: Depreciation
32,200
2017
Book value at the beginning of the year
372,800
Less: Depreciation
32,200
2018
Book value at the beginning of the year
340,600
Depreciation
32,200
Book value at the end of the year 2018
308,400
Book value at the end of the year 2018 = $ 308,400
Question 3: Using declining balance depreciation at twice the straight line rate, calculate the depreciation expense for 2018.
Step 1: Calculate depreciation under straight line method without considering salvage value
Depreciation = Original cost of the Asset / Estimated useful life
= 405,000 / 10
=$ 40,500
Step2: Calculate percentage of Depreciation
Percentage of Depreciation = Depreciation / Original cost of the asset x 100
= 40,500 / 405,000 x 100
= 10%
Step 3: Calculate Depreciation under Declining balance at twice the straight line rate
Depreciation = Book value at the beginning of the year x straight line rate of depreciation x 2
Depreciation for the year 2016
Book Value = 405,000
Depreciation = 405,000 x 10% x 2 = $81,000
Depreciation for the year 2017
Book Value = 405,000 – 81,000 = 324,000
Depreciation = 324,000 x 10% x 2 = $64,800
Depreciation for the year 2018
Book Value = 324,000 – 64800 = 259.200
Depreciation= 259,200 x 10% x 2 = $51,840
Depreciation for the year 2018 under Declining balance at twice the straight line rate = $51,840
2016
Cost of the asset
405,000
Less: Depreciation
32,200
2017
Book value at the beginning of the year
372,800
Less: Depreciation
32,200
2018
Book value at the beginning of the year
340,600
Depreciation
32,200
Book value at the end of the year 2018
308,400
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