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).