Blossom Company purchases equipment on January 1, Year 1, at a cost of $250,000.
ID: 2531199 • Letter: B
Question
Blossom Company purchases equipment on January 1, Year 1, at a cost of $250,000. The asset is expected to have a service life of 6 years and a salvage value of $20,000 Compute the amount of depreciation for each of Years 1 and 2 using the straight-line depreciation method. Depreciation for Year 1 Depreciation for Year 2 s Compute the amount of depreciation for each of Years 1 and 2 using the sum-of-the-years'-digits method. Depreciation for Year1 Depreciation for Year 2 Compute the amount of depreciation for each of Years 1 and 2 using the double-declining-balance method. (Round answers to O decimal places, e.g. 45,892.) Depreciation for Year 1 s Depreciation for Year 2Explanation / Answer
Depreciation under straight line method
= (Purchase cost – Salvage value) / Useful life
So, Depreciation for Year 1 = Depreciation for year 2
= ($250,000 - $20,000) / 6
= $38,333 each year
Depreciation under sum of years digits method = Depreciable base x Remaining useful life / Total useful life
Depreciable base = Purchase cost – Salvage value
= ($250,000 - $20,000)
= $230,000
Total useful life = n x (n + 1) / 2
Where, n = Number of years of useful life
= 6 x (6 + 1) / 2
= 21
So, depreciation for first year
= $230,000 x 6 / 21
= $ 65,714
Depreciation for second year
= $230,000 x 5 / 21
= $ 54,762
Depreciation rate under double declining balance method
= 1 / Useful life x 2
= 1 / 6 x 2
= 0.3333 or 33.33%
So, Depreciation under double declining balance method
= Book value at the beginning of the year x Depreciation rate
Year 1
= $250,000 x 33.33%
= $ 83,333
Book value at the beginning of second year
= Book value at the beginning of first year – Depreciation for first year
= $250,000 - $83,333
= $ 166,667
So, Depreciation for second year
= $166,667 x 33.33%
= $ 55,550