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