   Chapter 18, Problem 3CE

Chapter
Section
Textbook Problem

A machine costing $350,000 has a salvage value of$15,000 and an estimated life of three years. Prepare depreciation schedules reporting the depreciation expense, accumulated depreciation, and book value of the machine for each year under the double-declining-balance and sum-of-the-years’-digits methods. For the double-declining-balance method, round the depreciation rate to two decimal places.

To determine

Prepare depreciation expense schedules under double-declining-balance method and sum-of-years’- digits method.

Explanation

Double-declining-balance (DDB) 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.

Formula for double-declining-balance depreciation method:

Depreciation expense}=(Book value at the beginning of the period )  ×    Depreciation rate(Cost–Accumulated depreciation)×2Useful life

Prepare depreciation schedule under double-declining-balance method.

 Depreciation Schedule Double-Declining-Balance Method Year Beginning Book Value Rate Annual Depreciation Expense Accumulated Depreciation End of the Year Book Value End of the Year (1) (2) (3) (4) (5) [(1)×(2)] [(1)–(4)] 1 $350,000 2/3$234,500 $234,500$115,500 2 115,500 2/3 77,385 311,885 38,115 3 38,115 2/3 23,115 335,000 15,000

Table (1)

Working Notes:

Formula for accumulated depreciation:

Accumulated depreciation = {Depreciation expense in the previous years+Depreciation in current year}

Compute depreciation expense for Year 3.

Depreciation in Year 3=(Asset cost–Accumulated depreciation in Year 2–Residual value)=$350,000–$311,885–$15,000=$23,115

Sum-of-the-years’-digits method: The depreciation method which allocates the depreciable cost of the long-term asset annually based on the decreasing fraction or rate

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