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13 October, 16:04

Pollyanna Publishing, a textbook publishing firm, purchased a new machine for $80,000. This machine is expected to operate for 10 years, after which it will be sold for salvage value (estimated to be $8,000).

A. How much will the first and second year's depreciation expense be under the double-declining-balance method?

B. How much will the first and second year's depreciation expense be under the straight line method?

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  1. 13 October, 17:07
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    A.

    The first year's Depreciation Expense: $14,400

    The second year's depreciation expense: $11,520

    B.

    The first year's Depreciation Expense = The second year's depreciation expense = $7,200

    Explanation:

    A. Under the straight-line method, useful life is 10 years, so the asset's annual depreciation will be 10% of the Depreciable cost.

    Depreciable cost = Total asset cost - salvage value = $80,000-$8,000 = $72,000

    Under the double-declining-balance method the 10% straight line rate is doubled to 20% - multiplied times the Depreciable cost's book value at the beginning of the year.

    In the first year, depreciation expense = 20% x $72,000 = $14,400

    At the beginning of the second year, the Depreciable cost's book value is $72,000 - $14,400 = $57,600

    In the second year, depreciation expense = 20% x $57,600 = $11,520

    B.

    The company uses straight-line depreciation, Depreciation Expense each year is calculated by following formula:

    Depreciation Expense = (Cost of machine - salvage value) / Useful Life = ($80,000-$8,000) / 10 = $7,200

    The first year's Depreciation Expense = The second year's depreciation expense = $7,200
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