At the beginning of Year 1, Copeland Drugstore purchased a new computer system for $85,000. It is expected to have a five-year life and a $15,000 salvage value. b. Record the purchase of the computer system and the depreciation expense for the first year under straight-line and double-declining-balance methods in a financial statements model.

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Business

Logan Ray

23 October, 22:20

At the beginning of Year 1, Copeland Drugstore purchased a new computer system for $85,000. It is expected to have a five-year life and a $15,000 salvage value. b. Record the purchase of the computer system and the depreciation expense for the first year under straight-line and double-declining-balance methods in a financial statements model.

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Red Velvet · Answer 1

1. Purchase of computer system:

Debit = Computer System Account = $85000

Credit = Cash Account = $85000

2. Depreciation expense (straight-line)

Debit = Depreciation Account = $14000

Credit = Accumulated Depreciation Account = $14000

3. Depreciation expense (double-declining-balance)

Debit = Depreciation Account = $34000

Credit = Accumulated Depreciation Account = $34000

Explanation:

1. Straight-Line Method:

This is calculated by finding the difference between the asset's cost and salvage value and then dividing it by the number of years it will be used. It is the simplest method of calculating depreciation and believes that the asset's value depreciates equally every year. Depreciation per year is calculated as:

(Cost - Salvage value) / Number of useful life

($85,000 - $15000) / 5 = $14000

Depreciation for Year 1 = $14000

2. Double-declining balance Method:

This is where the asset's value is depreciated at twice the rate than the straight line method. The depreciation amounts would be higher in the early years of the asset's life and gradually reduce towards the end. Hence, it does not mean that the depreciation amount would be higher than the straight line basis.

Straight Line depreciation per year = 1/5 * x 100 = 20%

*as it is useful for five years

Hence double-depreciation value = 20% x 2 = 40%

Depreciation for year 1 = $85000 x 40% = $34000

Recording entries

1. Purchase of computer system:

Debit = Computer System Account = $85000

Credit = Cash Account = $85000

2. Depreciation expense (straight-line)

Debit = Depreciation Account = $14000

Credit = Accumulated Depreciation Account = $14000

3. Depreciation expense (double-declining-balance)

Debit = Depreciation Account = $34000

Credit = Accumulated Depreciation Account = $34000