   Chapter 10, Problem 10.10EX

Chapter
Section
Textbook Problem

Depreciation by two methodsA storage tank acquired at the beginning of the fiscal year at a cost of $75,000 has an estimated residual value of$10,000 and an estimated useful life of 20 years. Determine the following: (a) the amount of annual depreciation by the straight-line method and (b) the amount of depreciation for the first and second years computed by the double-declining-balance method.

(a)

To determine

Straight-line Depreciation: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:

Depreciation = (Cost of the assetResidual value)Estimated useful life of the asset

To determine: the amount of annual depreciation by the straight-line method.

Explanation

Determinethe amount of annual depreciation.

Cost of the storage tank= $75,000 Estimated residual value=$10,000

Estimated Useful Life =20 years

AnnualDepreciation = (Cost of the assetResidual value)Estimated useful life of the asset

(b)

To determine

Double-declining-balance method: It is an accelerated method of depreciation under which the depreciation declines in each successive year until the value of asset becomes zero. Under this method, the book value (original cost less accumulated depreciation) of the long-term asset is decreased by a fixed rate. It is double the rate of the straight-line depreciation. Use the following formula to determine the annual depreciation:

Depreciation = Purchase price × (2Useful life)

To determine: the amount of depreciation for each of the first two years by the double-declining-balance method.

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