   Chapter 11, Problem 3P ### Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

#### Solutions

Chapter
Section ### Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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# Depreciation Methods Sayers Company purchased a building for $250,000 on January 2, 2019. The building has an expected residual value of$20,000 at the end of its expected life of 20 years.Required: 1. Prepare a schedule showing depreciation expense for 2019 and 2020 and the book value on December 31, 2019, and December 31, 2020, for each of the following methods: a. straight-line b. sum-of-the-years’-digits c. double-declining-balance d. 150%-declining-balance 2. Next Level Holding all other things equal, what is the effect of depreciation on the rate of return?

1.

To determine

Prepare a schedule that screens the depreciation expense for 2019 and 2020, and the book value on December 31, 2019 and 2020 for each of the given depreciation method.

Explanation

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

Straight-line depreciation method: The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset is referred to as straight-line method.

Sum-of- the-years’ digits method:  Sum-of-the years’ digits method determines the depreciation by multiplying the depreciable base and declining fraction.

Double-declining-balance method: The depreciation method which assumes that the consumption of economic benefits of long-term asset is high in the early years but gradually declines towards the end of its useful life is referred to as double-declining-balance method

Prepare a schedule that screens the depreciation expense for 2019 and 2020, and the book value on December 31, 2019 and 2020 for each of the given depreciation method as follows:

 Year Book Value (A) Depreciation (B) Ending Book Value (A−B) a. Straight-line Method: 2019 $250,000$11,500 (1) $238,500 2020$238,500 $11,500 (1)$227,000 b. Sum-of-the-years’-digits: 2019 $250,000$21,905 (4) $228,095 2020$228,095 $20,810 (4)$207,285 c. Double-declining-balance: 2019 $250,000$25,000 (6) $225,000 2020$225,000 $22,500 (6)$202,500 d. 150%-declining balance method: 2019 $250,000$18,750 (8) $231,250 2020$231,250 $17,344 (8)$213,906

Table (1)

Working note (1):

Calculate the depreciation expense under straight line method:

2019:

Depreciation expenses=Acquisition cost – Residual valueUseful life =$250,000$20,00020 years=$11,500 2020: Depreciation expenses=Acquisition cost – Residual valueUseful life =$250,000$20,00020 years=$11,500

Working note (2):

Calculate the denominator of the fraction for sum-of-the-year’s digit.

Sum-of-the-digits = n×(n+1)2=20×(20+1)2=20×212=210

Working note (3):

Calculate the depreciable base of asset

2.

To determine

State the effect of the depreciation expense on the rate of return.

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