ACC - Depreciation & Double Declining method PDF

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Summary

Depreciation formulas and emphasis on the double-declining method....

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Depreciation (Double Declining Emphasis)

Double Declining method (Diminishing balance method) STEP 1: Identify the asset's opening book value and its remaining useful life. STEP 2: Calculate the straight-line depreciation rate.

Straight-Line Rate =

1 Useful Life

STEP 3: Multiply 2 with the straight-line depreciation rate to work out the declining-balance depreciation rate.

Declining-balance Depreciation Rate =2 × Straight Line Rate STEP 4: Apply the declining balance depreciation rate to the opening book value of the asset to calculate the depreciation expense for the period. (FOR FIRST YEAR) Declining balance Depreciation Expense = Declining balance Depreciation Rate × Opening Book Value = Dep 1 For the first period, the book value equals cost and for subsequent periods, it equals the difference between cost and accumulated depreciation. (FOR SECOND YEAR ONWARDS) Declining-balance Depreciation Expense = Declining-balance Depreciation Rate × (Cost- Dep 1) STEP 5: Subtract the depreciation expense from the opening book value of the asset and check that it is not less than the salvage value. If the closing book value is more than the salvage value, the depreciation expense worked out in Step 4 is the declining-balance depreciation expense for the period. However, if the book value drops below salvage value, calculate depreciation expense as the difference between opening book value and salvage value. An asset costing $20,000 has estimated useful life of 5 years and salvage value of $4,500. Calculate the depreciation for the first year of its life using double declining balance method. Straight line rate = 1/Useful life = 1/5 = 0.2 Double Declining Rate = 2 x 0.2 = 0.4 Double Declining rate = 2/useful life = 0.4 Depreciation expense (Year 01) = Double Declining rate x cost = 0.4 x 20000 = 8000 Journal entry for year 1 Depreciation expense Dr. Accumulated Depreciation Cr.

8000 8000

Depreciation (Double Declining Emphasis)

Calculate depreciation expense for the second year. Depreciation expense (Year 2) = Double declining rate x (Cost – Accumulated Depreciation) = 0.40 x (20000 – 8000) = 4800 Journal entry For second year Depreciation expense Dr.

4800

Accumulated Depreciation Cr.

4800

Examples: Equipment with a cost of $450,000 has an estimated salvage value of $30,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used 2,700 hours? $113,400.

Equipment with a cost of $450,000 has an estimated salvage value of $30,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 2,700 hours? $105,000.

Equipment with a cost of $450,000 has an estimated salvage value of $30,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the declining balance method (double). What is the amount of depreciation for the first full year, during which the equipment was used 2,700 hours? $225,000.

Misha bought a machine for £39,000, which she expects to have a useful life of four years and a residual value of £4,000 at the end of that time. If depreciation is to be provided on the straight-line basis, the depreciation expense is:

Depreciation (Double Declining Emphasis) £8750

Straight Line Method: A company purchases a machine for its manufacturing facility for $90,000 in January and as of December has recorded only 11 months of depreciation. The salvage value is $20000. The machinery is estimated to have a useful life of 5 years. What is the proper entry to record the year-end adjustment for depreciation, assuming the straight-line method is used? Depreciation expense = (90000-20000)/5 = 14000 Journal entry: Depreciation expense Dr.

14000

Accumulated Depreciation Cr.

Equipment

14000

90000

- Accumulated depreciation

14000 76000

A company purchased a truck for $25,000 on January 1 and as of December has not recorded any depreciation. The salvage value is $2000. The truck is estimated to have a useful life of 5 years, and straight-line depreciation is used. What is the proper entry to record the year-end adjustment for depreciation? Depreciation expense = (25000-2000)/5 = 4600 Journal entry: Depreciation expense Dr.

4600

Accumulated Depreciation Cr.

4600

Units of Production method A coal mine was purchased by X Corporation for $16,000,000. Salvage value is 1,000,000. It was estimated that the mine has capacity to produce 200,000 tons of coal. The company extracted 46,000 tons during its first year of operation. Calculate the depreciation and record journal entry. Depreciation expense = [(16,000,000 – 1,000,000)/200,000] X 46000 = 3,450,000 Journal entry: Depreciation expense Dr.

3,450,000

Depreciation (Double Declining Emphasis)

Accumulated Depreciation Cr. 2nd year  50000 tons = {16000000-1000000)/200000} * 50000 = 3750000

3,450,000...