### Exercise 4

Entity P has the following equipment:

 Purchase date September 1, 20x1 Cost \$360,000 Salvage value \$36,000 Amount to be depreciated \$324,000 Years of useful life 5

(1) If Entity P used the straight-line depreciation method, what is the amount of depreciation for each year?

(2) If Entity P used the double-declining balance depreciation method, what is the amount of depreciation for each year?

(1) Straight-line depreciation method

 Cost Salvage value Years of useful life Annual depreciation # of months for depreciation Depreciation expense Accumulated depreciation 20x1 \$360,000 \$36,000 5 \$64,800(*1) 4 \$21,600(*2) \$21,600 20x2 \$360,000 \$36,000 5 \$64,800 12 \$64,800 \$86,400 20x3 \$360,000 \$36,000 5 \$64,800 12 \$64,800 \$151,200 20x4 \$360,000 \$36,000 5 \$64,800 12 \$64,800 \$216,000 20x5 \$360,000 \$36,000 5 \$64,800 12 \$64,800 \$280,800 20x6 \$360,000 \$36,000 5 \$64,800 8 \$43,200 \$324,000

[Note]

(*1) (\$360,000 - \$36,000) x 1/5 = \$64,800

(*2) (\$360,000 - \$36,000) x 1/5 x 4/12 = \$21,600

(2) Double-declining balance depreciation method

 Cost Beginning book value Depreciation rate Number of months for depreciation Depreciation expense Accumulated depreciation Ending book value 20x1 \$360,000 \$360,000 40%(*1) 4 \$48,000(*2) \$48,000 \$312,000 20x2 \$360,000 \$312,000 40% 12 \$124,800(*3) \$172,800 \$187,200 20x3 \$360,000 \$187,200 40% 12 \$74,880 \$247,680 \$112,320 20x4 \$360,000 \$112,320 40% 12 \$44,928 \$292,608 \$67,392 20x5 \$360,000 \$67,392 40% 12 \$26,957 \$319,565 \$40,435 20x6 \$360,000 \$40,435 40% 8 \$4,435 \$324,000 \$36,000

[Note]

(*1) Useful life of equipment = 5 years

Annual depreciation rate under straight-line depreciation method = 1/5 = 20%

Annual depreciation rate under double-declining balance method = 20% x 2 = 40%

(*2) \$360,000 x 40% x 4/12 = \$48,000

(*3) \$312,000 x 40% x 12/12 = \$124,800

Ending book value = Cost - Accumulated depreciation