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Intermediate Accounting: Reporting...

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

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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A machine with a 4-year estimated useful life and an estimated 15% residual value was acquired on January 1. Would depreciation expense using the sum-of-the-years’-digits method be higher or lower than depreciation expense using the double-declining balance method in the first and second years:

Chapter 11, Problem 5MC, A machine with a 4-year estimated useful life and an estimated 15% residual value was acquired on

To determine

Identify the correct option for the given statement.

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.

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.

In this case, both the sum of the year’s digit method and double declining balance method comes under the accelerated depreciation method, however the depreciation rate (50%) of double declining balance method is more than the fraction (1/10) of sum of year’s digit method. Hence, the depreciation expense under sum of the year’s digit method would be lower than the double declining method during the first year.

In the second year, the depreciation expense under sum of the year’s digit method would be higher than the double declining method because under double declining balance method the book value of assets gets decreased each year, whereas the depreciation base under sum of the year’s digit method is same for all the year...

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