Exercise 3

On September 1, 20x1, Company R purchased equipment at $600,000.

Equipment is depreciated using the double-declining balance depreciation method.

Useful life of the building is 4 years.

Salvage value of equipment at the end of useful life is estimated as $60,000

What is the amount of depreciation expense for 20x1?

What is the book value of equipment at December 31, 20x1?

        

        Depreciation expense = Beginning book value x Annual deprecation rate

        Book value = Cost - Accumulated depreciation

        Annual depreciation rate = Straight-line depreciation rate x 200%

        = (1/useful life) x 200% = (1/4) x 2 = 25% x 2 = 50%

Cost

Beginning Book Value

Depreciation Expense

Accumulated Depreciation

Ending Book Value

9/1 - 12/31, 20x1

$600,000

$600,000

$100,000

$100,000

$500,000

1/1 - 12/31, 20x2

$600,000

$500,000

$250,000

$350,000

$250,000

1/1 - 12/31, 20x3

$600,000

$250,000

$125,000

$475,000

$125,000

1/1 - 12/31, 20x4

$600,000

$125,000

$62,500

$537,500

$62,500

1/1 - 8/31, 20x5

$600,000

$62,500

$2,500

$540,000

$60,000

        [Note]

        Annual depreciation expense for 20x1 = $600,000 x50% = $300,000

        Depreciation expense for 9/1 - 12/31, 20x1 = $300,000 x (4/12) = $100,000

        Depreciation expense for 20x2 = $500,000 x 50% = $250,000

        Depreciation expense for 20x3 = $250,000 x 50% = $125,000

        Depreciation expense for 20x4 = $125,000 x 50% = $62,500

        Depreciation expense for 20x5 = $2,500 instead of $31,250 (=$62,500 x 50%)

        Depreciation stops when the book value equals to residual value (salvage value).