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Sunrise Development Industries purchased a depreciable asset for $50,000 on 1 July 2016. The...

Question:

Sunrise Development Industries purchased a depreciable asset for $50,000 on 1 July 2016. The asset has a five-year useful life and a $10,000 estimated residual value. The company will use the straight-line method of depreciation for book purposes. However, Sunrise will use the reducing-balance method for tax purposes. Assume a tax rate of 30 percent.

Required

a. Prepare depreciation schedules using the straight-line and reducing-balance methods (at 1.5 times the straight-line rate) of depreciation for the useful life of the asset.

b. Calculate the tax savings for the financial year ended 30 June 2017 from the use of the accelerated depreciation method for tax purposes.

c. Under the straight-line method of depreciation, what is the gain or loss if the equipment is sold (i) at the end of June 2019 for $30,000 or (ii) at the end of June 2020 for $16,000?

d. How is the gain or loss on the disposal of the equipment presented in the financial statements assuming no revaluations?

Depreciation:

There are two methods to record depreciation expense. The first method is the direct method under which depreciation expense is recorded in the asset account which makes the book value of the asset as the ending balance. The second method is the accumulated balance method, it records the depreciation in a separate account.

Answer and Explanation:

Requirement a, b, & c:

(a) Computation for depreciation expense
Method
Particulars Straight-Line Double Declining
Asset Cost (a) $50,000.00 $50,000.00
Less: Salvage Value of Asset -$10,000.00 -$10,000.00
Depreciable Value of Asset (b) $40,000.00 $40,000.00
Useful Life of Asset (in years) 5 5
Rate of Depreciation (1/5); (2/5) 20% 40%
Depreciation Expense:
2016 $8,000 $20,000.00
2017 $8,000 $12,000.00
2018 $8,000 $8,000.00
2019 $8,000 $0.00
2020 $8,000 $0.00
(b) Computation for Tax Saving
Depreciation Expense: (June, 2017) ($20,000 x 30%) $6,000.00
(c) Computation for gain or loss on Disposal
June, 2019 June, 2020
Sales Value $30,000 $16,000
Less: Book Value ($50,000 - $32,000); ($50,000 - $40,000) -$18,000 -$10,000
Profit (Loss) $12,000 $6,000

(d) The gain or loss on the disposal of the equipment is presented in the income statement as non-operating profit or loss.


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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