Exercise 11-1 Pearl Company purchases equipment on January 1, Year 1, at a cost

Question

Exercise 11-1

Pearl Company purchases equipment on January 1, Year 1, at a cost of $567,490. The asset is expected to have a service life of 12 years and a salvage value of $48,400.

Compute the amount of depreciation for Years 1 through 3 using the straight-line depreciation method. (Round answers to 0 decimal places, e.g. 5,125.)

Compute the amount of depreciation for each of Years 1 through 3 using the sum-of-the-years'-digits method.

Compute the amount of depreciation for each of Years 1 through 3 using the double-declining-balance method. (Round depreciation rate to 2 decimal places, e.g. 15.84%. Round answers to 0 decimal places, e.g. 45,892.)

Depreciation for Year 1 $

Depreciation for Year 2 $

Depreciation for Year 3 $

Explanation / Answer

1. Deperciation using Straight line method

Deperciation = Cost-salavage value/life of asset

= (567,490-48,400)/12 = 43,258

43,258 deperciation is charged every year through the life of asset

2. Deperciation using Sum of Years Digits

Sum of years digits = 1+2+3+4+5+6+7+8+9+10+11+12 = 78

Depreciable Base = 567490-48400 = 519090

3. Deperciation using Double Declining Balance Deperciation Method

Straight-line Depreciation Rate = 1/12 = 0.1 i.e 10%

Declining Balance Rate = 2*10% = 20%

Deperciation of year 1 = 20%*567490 = 113,498

Deperciation of year 2 = 20%*453992 = 90,798.40 (567490-113498=453992)

Deperciation of year 3 = 20%*363193.60 = 72,638.72 (453992-90798.40=363193.60)

Years Depreciable Base Deperciation Factor Deperciation Expense 1 519090 12/78 12/78*519090 = 79860 2 519090 11/78 11/78*519090 = 73205 3 51909 10/78 10/78*519090 = 66550

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