Answer:
Straight line depreciation allocates equal portion of depreciation expenses to each year of the assets expected useful life after deducting its expected residual value. The formula for straight line depreciation is cost minus residual value divided by the number of years of useful life of the asset.
Declining Balance method is an accelerated depreciation method. In this method depreciation rate is calculated as a fixed percentage of the straight line depreciation rate. Formula for declining balance method is opening book value multiplied by depreciation rate.
a)
1)
Calculate depreciation expense using straight line method:
Depreciation is calculated by using following formula:
Depreciation expense is calculated as follows:
2)
Calculate depreciation expense using double declining balance method:
3)
Calculate depreciation expense using 150% declining balance method:
150% declining balance method
b)
For financial reporting purposes straight line method is used as it maximises profit.
c)
There is no direct cash effect of gain or loss reported in companies income statement.
Answer:
a. Two factors have caused the truck to depreciate: (1) physical deterioration and (2) obsolescence. The miles driven during the past six years have caused wear and tear on all of the truck's major components, including its engine, transmission, brakes, and tires. As these components deteriorate, their fair values, in turn, depreciate. Furthermore, during the time that you have owned the truck, innovations have been developed leading to improved fuel economy, higher horsepower, better handling, and more corrosion-resistant materials. These innovations have made the truck obsolete in many respects. As the design and engineering technologies associated with the truck become more and more outdated, its fair market value will continue to depreciate.
b. No. It is not likely that the bank will lend you an additional $5,000, even if you agree to pledge your truck as collateral. Your truck will continue to depreciate in value each year. By the time you begin repayment of your loan, it will be worth less to the bank than its current fair market value.
c. Depreciation is a process of cost allocation, not a process of valuation. As such, accounting records do not attempt to show the current fair values of business assets. Only by coincidence would the balance sheet show $10,000 in accumulated depreciation on this truck.
Answer:
Calculated depreciation expense using straight line method:
Straight line depreciation allocates equal portion of depreciation expenses to each year of the assets expected useful life after deducting its expected residual value. The formula for straight line depreciation is cost minus residual value divided by the number of years of useful life of the asset.
Depreciation is calculated by using following formula:
Depreciation expense is calculated as follows:
Declining Balance method is an accelerated depreciation method. In this method depreciation rate is calculated as a fixed percentage of the straight line depreciation rate. Formula for declining balance method is opening book value multiplied by depreciation rate.
Prepare a schedule using 150% declining balance method:
Prepare a schedule using 200% declining balance method:
b)
Highest possible earning can be reported by following straight line method. Minimum tax can be paid by following 200% Declining Balance method.
c)
Lowest possible book value will be reported in 200% Declining Balance Method. The book value is the assets value in the market in its present condition and location.
d)
Calculate gain/loss on resale:
To get gain/loss on resale, deduct net book value from resale price.