Trevor Company purchased a new equipment on January 1st, 2015 for $5.2 million. The estimated...


Trevor Company purchased a new equipment on January 1st, 2015 for $5.2 million. The estimated useful life is five years and the residual value is $200,000.

a. Compute depreciation expense for year 2015 and 2016

b. Using straight line method

c. Using double declining balance method

If the equipment is likely to provide equal benefits during each year of its useful life, which of the two depreciation methods would be more appropriate under GAAP?

Assume that the company uses straight line deprecation method. It sell the equipment on January 1, 2017 for $4m.

Depreciating an Asset:

Long-term operational assets are depreciated over their useful lives in order to recognize their cost in the financial statements over the time the assets are used to produce revenue for the company.

Answer and Explanation:

b. Straight Line:

Cost $5,200,000
Salvage value 200,000
Depreciable amount $5,000,000
Useful life 5 years
Depreciation per year $1,000.000

Straight line depreciation
Year Deprecation Expense
2015 $1,000,000
2016 $1,000,000

c. Double declining balance:

Cost $5,200,000
Useful life 5 years
Regular depreciation rate 20%
Double declining digits depreciation rate 40%

Double declining balance:
Year Beginning book value Depreciation rate Depreciation expense Accumulated depreciation Ending book value
2015 $5,200,000 40% $2,080,000 $2,080,000 $3,120,000
2016 $3,120,000 40% $1,248,000 $3,328,000 1,872,000

The accounting standards require that the depreciation expense mirror as best possible the usage of th asset, so in this case the straigh-line method would be the most appropaite.

The gain/loss will be:

Cost Price $5,200,000
Accumulated depreciation (2,000,000)
Book value on the date of the sale $3,200,000
Proceeds on disposal 4,000,000
Gain on disposal $800,000

Learn more about this topic:

Methods of Depreciation

from Business 110: Business Math

Chapter 6 / Lesson 1

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