Assignment
Straight-line depreciation is a method that charges an equal amount of depreciation for each year the asset is in service. In the case of this purchase, straight-line depreciation would amount to $18,000 per year for 10 years. This amount is computed as follows:
Step 1. Compute the cost net of salvage or trade-in value: 200,000 less 10% salvage value or 20,000 equals 180,000.
Step 2. Divide the resulting figure by the expected life (also known as estimated useful life): 180,000 divided by 10 equals 18,000 depreciation per year for 10 years.
Accelerated depreciation represents methods that are speeded up, or accelerated. In other words a greater amount of depreciation is taken earlier in the life of the asset. One example of accelerated depreciation is the double-declining balance method. Unlike straight-line depreciation, trade-in or salvage value is not taken into account until the end of the depreciation schedule. This method uses book value, which is the net amount remaining when cumulative previous depreciation is deducted from the asset's cost. The computation is as follows:
Step 1. Compute the straight-line rate: 1 divided by 10 equals 10%.
Step 2. Now double the rate (as in double-declining method): 10% times 2 equals 20%.
Step 3. Compute the first year's depreciation expense: 200,000 times 20% equals 40,000.
Step 4. Compute the carry-forward book value at the beginning of the second year: 200,000 book value beginning Year 1 less Year 1 depreciation of 40,000 equals book value at the beginning of the second year of 160,000.
Step 5. Compute the second year's depreciation expense: 160,000 times 20% equals 32,000.
Step 6. Compute the carry-forward book value at the beginning of the third year: 160,000 book value beginning Year 2 less Year 2 depreciation of 32,000 equals book value at the beginning of the third year of 128,000.
Continue until the asset's salvage or trade-in value has been reached.
- Do not depreciate beyond the salvage or trade-in value.
Using the format in the above Table 8-A-5, compute units of service depreciation using the following assumptions:
Cost to be depreciated = $50,000
Salvage value = zero
Total units of service = 10,000
Units of service per year: Year 1 = 2,200; Year 2 = 2,100; Year 3 = 2,300; Year 4 = 2,200; Year 5 = 200
Using the same format, compute units of service depreciation using adjusted assumptions as follows:
Cost to be depreciated = $50,000
Salvage value = $5,000
Total units of service = 10,000
Units of service per year: Year 1 = 2,200; Year 2 = 2,100; Year 3 = 2,300; Year 4 = 2,200; Year 5 = 200