An equipment was purchased for $18,000. It has a useful life of 5 years and a residual value of $2,000. Determine the depreciation expense for the first year using the double-declining-balance method?
A) $6,400
B) $3,200
C) $7,200
D) $3,600

Question

Quizplus · Accepted Answer

To use the double-declining-balance method, we need to follow these steps:

1. Calculate the straight-line depreciation rate:

Straight-line depreciation rate = 1 / Useful life
Straight-line depreciation rate = 1 / 5 years
Straight-line depreciation rate = 0.2 or 20%

2. Calculate the double-declining-balance depreciation rate:

Double-declining-balance depreciation rate = 2 * Straight-line depreciation rate
Double-declining-balance depreciation rate = 2 * 0.2
Double-declining-balance depreciation rate = 0.4 or 40%

3. Calculate the depreciation expense for the first year:

Depreciation expense = Beginning book value * Double-declining-balance depreciation rate
Beginning book value = Cost of equipment - Residual value
Beginning book value = $18,000 - $2,000
Beginning book value = $16,000

Depreciation expense = $16,000 * 0.4
Depreciation expense = $6,400

However, with the double-declining-balance method, we need to make sure that the depreciation expense does not reduce the book value of the asset below its residual value. If that happens, we need to adjust the depreciation expense.

In this case, the book value after the first year would be:

Book value = Beginning book value - Depreciation expense
Book value = $16,000 - $6,400
Book value = $9,600

Since $9,600 is below the residual value of $2,000, we need to adjust the depreciation expense.

Adjusted depreciation expense = Beginning book value - Residual value / Useful life
Adjusted depreciation expense = ($18,000 - $2,000) / 5 years
Adjusted depreciation expense = $16,000 / 5 years
Adjusted depreciation expense = $3,200

Therefore, the depreciation expense for the first year using the double-declining-balance method would be $3,200, which is answer choice B. However, we need to be careful with this method and make sure we always check for the residual value and adjust the depreciation expense if necessary. Therefore, answer choice C, $7,200, is not the best choice.

An Equipment Was Purchased for $18,000