Schager Company purchased a computer system at a cost of $40,000.The estimated useful life is 10 years,and the estimated residual value is $5,000.Assuming the company will use the double-declining-balance method,what is the depreciation expense for the second year?
A)$8,000.
B)$7,000.
C)$5,600.
D)$6,400.

Question

Quizplus · Accepted Answer

Using double-declining-balance method, the annual depreciation rate is calculated as:

Depreciation rate = 2 / useful life

= 2 / 10

= 0.2 or 20%

For the first year, the depreciation expense is:

= (Cost - Residual value) x Depreciation rate

= ($40,000 - $5,000) x 20%

= $7,000

For the second year, the book value at the beginning of the year is:

= Cost - Depreciation expense in year 1

= $40,000 - $7,000

= $33,000

The depreciation expense for year 2 is:

= Book value at the beginning of the year x Depreciation rate

= $33,000 x 20%

= $6,600

However, since the remaining book value after subtracting the depreciation expense would be less than the estimated residual value, the depreciation expense for year 2 is limited to the amount needed to depreciate the asset to its estimated residual value:

= $33,000 - $5,000

= $28,000

Therefore, the depreciation expense for year 2 is $6,400 (option D).

Schager Company Purchased a Computer System at a Cost of $40,000.The