Buffalo Company acquired a plant asset at the beginning of Year 1. The asset has

Question

Buffalo Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods. You are to assume that the following schedules have been correctly prepared for this asset using (1) the straight-line method, (2) the sum-of-the-years'-digits method, and (3) the double-declining-balance method. Year Straight-Line Sum-of-the- Years'-Digits Double-Declining- Balance 1 $12,060 $20,100 $26,800 2 12,060 16,080 16,080 3 12,060 12,060 9,648 4 12,060 8,040 5,789 5 12,060 4,020 1,983 Total $60,300 $60,300 $60,300 Answer the following questions. What is the cost of the asset being depreciated? Cost of asset $ LINK TO TEXT What amount, if any, was used in the depreciation calculations for the salvage value for this asset? Salvage value $ LINK TO TEXT Which method will produce the highest charge to income in Year 1? The method that produces the highest charge to income in Year 1 is LINK TO TEXT Which method will produce the highest charge to income in Year 4? The method that produces the highest charge to income in Year 4 is LINK TO TEXT Which method will produce the highest book value for the asset at the end of Year 3? The method that produces the highest book value for the asset at the end of Year 3 is LINK TO TEXT If the asset is sold at the end of Year 3, which method would yield the highest gain (or lowest loss) on disposal of the asset? The method that will yield the highest gain (or lowest loss) on disposal of the asset if the asset is sold at the end of Year 3 is

Explanation / Answer

(a)     If there is any salvage value and the amount is unknown (as is the case here), the cost would have to be determined by looking at the data for the double-declining balance method.

100%

= 20%; 20% X 2 = 40%

5

          Cost X 40% = $26,800

          $26,800 ÷ .40 = $67,000 Cost of asset

(b)     $67,000 cost [from (a)] – $60,300 total depreciation = $6,700 salvage value.

(c)     The highest charge to income for Year 1 will be yielded by the double-declining balance method.

(d)     The highest charge to income for Year 4 will be yielded by the straight-line method.

(e)     The method that produces the highest book value at the end of Year 3 would be the method that yields the lowest accumulated depreciation at the end of Year 3, which is the straight-line method.

Computations:

St.-line = $67,000 – ($12,060 + $12,060 + $12,060) = $30,820 book value, end of Year 3.

S.Y.D. = $67,000 – ($20,100 + $16,080 + $12,060) = $18,760 book value, end of Year 3.

D.D.B. = $67,000 – ($26,800 + $16,080 + $9,648) = $14,472 book value, end of Year 3.

(f)      The method that will yield the highest gain (or lowest loss) if the asset is sold at the end of Year 3 is the method which will yield the lowest book value at the end of Year 3, which is the double-declining balance method in this case.

100%

= 20%; 20% X 2 = 40%

5

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