Concept explainers
a.
Calculate the depreciation expense for each of the five years, assuming the use of straight-line depreciation.
a.
Explanation of Solution
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:
Calculate the depreciation expense for each of the five years using straight-line depreciation as follows.
Date |
(W.N. 1) | Depreciation Rate (B) | Depreciation expense (in $) |
Year 1 | 35,000 | 1/5 | 7,000 |
Year 2 | 35,000 | 1/5 | 7,000 |
Year 3 | 35,000 | 1/5 | 7,000 |
Year 4 | 35,000 | 1/5 | 7,000 |
Year 5 | 35,000 | 1/5 | 7,000 |
Table (1)
Working note 1:
Calculate the depreciable cost.
Hence, the depreciation expense for each of the five years under straight-line depreciation is $7,000.
b.
Calculate the depreciation expense for each of the five years, assuming the use of double-declining-balance depreciation.
b.
Explanation of Solution
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
Book value:
The amount of acquisition cost of less accumulated depreciation as on a particular date is referred to as book value.
Formula for book value:
Accumulated depreciation:
The total amount of depreciation expense deducted, from the time asset acquired till date, as reported in the account as on a particular date, is referred to as accumulated depreciation.
Formula for accumulated depreciation:
Calculate the depreciation expense for each of the five years using double-declining-balance depreciation as follows.
Date |
Double-Declining-Balance Depreciation Rate (A) (W.N. 2) | Book Value (Refer note) (in $) (B) | Depreciation expense (in $) |
Year 1 | 0.40 | 40,000 | 16,000 |
Year 2 | 0.40 | 24,000 | 9,600 |
Year 3 | 0.40 | 14,400 | 5,760 |
Year 4 | 0.40 | 8,640 | 3,456 |
Year 5 |
0.40 | 5,184 |
(W. N. 3) 184 |
Table (2)
Working note 2:
Determine the depreciation rate applied each year.
Useful life = 5 years
Working note 3:
Compute depreciation expense on Year 5.
Hence, the depreciation expense for each of the five years using double-declining-balance depreciation are $16,000, $9,600, $5,760, $3,456, and $184 respectively.
c.
Identify whether the choice of one depreciation method over another would produce a different amount of
c.
Explanation of Solution
Statement of cash flows:
This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period.
Cash flows from operating activities:
These refer to the cash received or cash paid in day-to-day operating activities of a company. In this direct method, cash flow from operating activities is computed by using all cash receipts and cash payments during the year.
Identify whether the choice of one depreciation method over another would produce a different amount of cash flow for any year and discuss its reason as follows:
Depreciation is a non-cash expense. It is added to net income while preparing the statement of cash flows under the indirect method. Due to this, the cash flow is not affected. However, there will be differences in the taxable income and the tax paid amount, when different depreciation methods are used for the tax purposes.
Hence, the choice of one depreciation method over another would produce a different amount of cash flow for the year.
d.
Compute the amount of gain or loss on sale of the computer system using each depreciation method.
d.
Explanation of Solution
Compute the amount of gain or loss on sale of the computer system using each depreciation method as follows:
Double declining method:
Working note 4:
Calculate book value of the computer system.
Working note 5:
Calculate book value of the computer system.
Hence, the amount of gain on sale of the computer system using straight-line depreciation method, and double-declining-balance depreciation method are $3,000, and $9,816 respectively.
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Chapter 6 Solutions
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