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Becker Office Service purchased a new computer system in 2016 for $39,500. It is expected to have...

Question:

Becker Office Service purchased a new computer system in 2016 for $39,500. It is expected to have a five-year useful life and a $2,700 salvage value. The company expects to use the system more extensively in the early years of its life.

a) Calculate the depreciation expense for each of the five years, assuming the use of straight-line depreciation.

b) Calculate the depreciation expense for each of the five years, assuming the use of double-declining-balance depreciation. (Do not round intermediate calculations. Round your final answers to the nearest dollar amount.)

c) Assume that Becker Office Service sold the computer system at the end of the third year for $20,000. Compute the amount of gain or loss using each depreciation method. (Round your answers to the nearest dollar amount.)

Depreciation:

Depreciation is the manner by which companies expense the wear and tear incurred by their fixed assets over time. Depreciation may be calculated using various methods with the simplest method being the straight-line method. To record depreciation, depreciation expense is debited and accumulated depreciation, a contra-asset account, is credited.

Answer and Explanation:

Part a)

Year Beginning Book Value Depreciation Expense Ending Book Value
1 $39,500 $7,360 $32,140
2 $32,140 $7,360 $24,780
3 $24,780 $7,360 $17,420
4 $17,420 $7,360 $10,060
5 $10,060 $7,360 $2,700

Part b)

Year Beginning Book Value x DDB Rate
(2 x (1 / 5))
= Depreciation Expense Ending Book Value
1 $39,500 40% $15,800 $23,700
2 $23,700 40% $9,480 $14,220
3 $14,220 40% $5,688 $8,532
4 $8,532 40% $3,413 $5,119
5 $5,119 40% $2,048 $3,072

Part c)

Straight-Line

Consideration Received $20,000
Less: Book Value End of Third Year $17,420
Gain on Sale $2,580

Double Declining Balance

Consideration Received $20,000
Less: Book Value End of Third Year $8,532
Gain on Sale $11,468

Learn more about this topic:

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How to Calculate Depreciation Expense: Definition & Formula

from Financial Accounting: Help and Review

Chapter 5 / Lesson 14
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