A piece of equipment was acquired on January 1, 2010, at a cost of $22,000, with an estimated residual value of $2,000 and an estimated useful life of four years. The company uses the double-declining-balance method. What is its book value at December 31, 2011?
A) $5,500
B) $10,000
C) $11,000
D) $12,000

Question

Quizplus · Accepted Answer

The double-declining-balance method is a depreciation method that allocates a larger portion of the cost of an asset to the early years of its useful life. The depreciation rate is twice the straight-line depreciation rate.The straight-line depreciation rate is calculated as follows:Depreciation rate = (Cost of asset - Residual value) / Useful lifeIn this case, the cost of the asset is $22,000, the residual value is $2,000, and the useful life is four years. Therefore, the straight-line depreciation rate is:Depreciation rate = (22,000 - 2,000) / 4 = 5,000 / 4 = 1,250The double-declining-balance depreciation rate is twice the straight-line depreciation rate, or 2 * 1,250 = 2,500.The depreciation expense for the first year is calculated as follows:Depreciation expense = Depreciation rate * Book valueIn this case, the book value at the beginning of the first year is $22,000. Therefore, the depreciation expense for the first year is:Depreciation expense = 2,500 * 22,000 = 55,000The book value at the end of the first year is calculated as follows:Book value = Cost of asset - Accumulated depreciationIn this case, the accumulated depreciation at the end of the first year is $55,000. Therefore, the book value at the end of the first year is:Book value = 22,000 - 55,000 = 11,000The book value at the end of the second year is calculated as follows:Book value = Book value at the end of the previous year - Depreciation expenseIn this case, the depreciation expense for the second year is $27,500 (2,500 * 11,000). Therefore, the book value at the end of the second year is:Book value = 11,000 - 27,500 = 5,500Therefore, the book value of the equipment at December 31, 2011, is $5,500.

A Piece of Equipment Was Acquired on January 1, 2010