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2 September, 05:22

On January 2, 2021, the Jackson Company purchased equipment to be used in its manufacturing process. The equipment has an estimated life of eight years and an estimated residual value of $50,125. The expenditures made to acquire the asset were as follows:

Purchase price $220,000

Freight charges 6800

Installation charges 10,000

Jackson's policy is to use the double-declining-balance (DDB) method of depreciation in the early years of the equipment's life and then switch to straight line halfway through the equipment's life.

Required:

Calculate depreciation for each year of the asset's eight-year life.

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Answers (1)
  1. 2 September, 06:46
    0
    Jackson Company

    Calculation of the Depreciation for each year:

    a) Using the double-declining-balance (DDB) method of depreciation:

    1st year, the depreciation charge = $59,200 ($236,800 x 25%)

    2nd year, the depreciation charge = $44,400 ($236,800 - 59,200) x 25%

    3rd year, the depreciation charge = $33,300 ($236,800 - 103,600) x 25%

    4th year, the depreciation charge = $24,975 ($236,800 - 136,900) x 25%

    5th year, the usage of straight-line method commences:

    Depreciation charge = $58,100/4 = $14,525

    6th year, depreciation charge = $14,525

    7th year, depreciation charge = $14,525

    8th year, depreciation charge = $14,525

    Explanation:

    a) Asset's recognized cost:

    Purchase price $220,000

    Freight charges 6,800

    Installation charges 10,000

    Total cost = $236,800

    b) Useful life = 8 years, with salvage value of $50,125.

    c) Double-declining balance depreciation rate = 25% (100/8 * 2)

    d) Accumulated Depreciation at the end of:

    1st year = $59,200

    2nd year = $103,600 ($59,200 + 44,400)

    3rd year = $136,900 ($103,600 + 33,300)

    4th year = $128,575 ($136,900 + 24,975)

    5th year = $143,100 ($128,575 + 14,525)

    6th year = $157,625 ($143,100 + 14,525)

    7th year = $172,150 ($157,625 + 14,525)

    8th year = $186,675 ($172,150 + 14,525)

    e) Book value of asset at the end of the fourth year:

    Cost = $236,800

    Accumulated depreciation $128,575

    Book value = $108,225

    Salvage value = $50,125

    Straight-line depreciable amount = $58,100

    f) The double-declining-balance depreciation method is an accelerated depreciation method that expenses the cost of an asset more rapidly by multiplying the straight-line method's rate by 2 and applying this rate on the reducing balance. On the other hand, the straight-line depreciation method uses the same amount of depreciation each year over an asset's useful life. The double-declining balance method does not take into consideration the salvage value unlike the straight-line depreciation method until towards the end of the useful life of the asset.
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