A plant asset acquired on October 1, 2017, at a cost of $400,000 has an estimated useful life of 10 years. The salvage value is estimated to be $40,000 at the end of the asset's useful life Instructions

Determine the depreciation expense for the first two years using:

(a) the straight-line method.

(b) the double-declining-balance method

Answer:

a)

Depreciation under straight line method

= (Purchase cost – Salvage value) / Useful life x Number of months used / 12 months

Since the asset has been used from October to December for the first year (3 months), depreciation will be calculated for 3 months for the first year

So, Depreciation for Year 1

= ($400,000 - $40,000) / 10 x 3 / 12

= $ 9,000

Depreciation for second year

= ($400,000 - $40,000) / 10 x 12 / 12

= $36,000

b)

Depreciation rate under double declining balance method

= 1 / Useful life x 2

= 1 / 10 x 2

= 0.20 or 20%

Since the asset has been used from October to December for the first year (3 months), depreciation will be calculated for 3 months for the first year

Depreciation under double declining balance method for the first year

= Book value at the beginning of the year x Depreciation rate x Number of months used / 12 months

= $400,000 x 20% x 3 / 12

= $ 20,000

Book value at the beginning of second year

= Book value at the beginning of first year – Depreciation for first year

= $400,000 - $20,000

= $380,000

So, Depreciation for second year

= $380,000 x 20% x 12 / 12

= $ 76,000