Prime, Inc., purchases $100,000 in construction machinery on January 1, Year 1. The useful life is estimated to be 8 years, and the residual value is estimated to be $20,000. If the company uses the double-declining-balance method, the asset will reach its residual value in the ____ year.
Double declining method
Depreciation rate = 1/8 = 12.5%
Double declining rate = 12.5*2 = 25%
Year 1
Book value = 100,000 - 25%*100,000
= 75,000
Year 2
Book value = 75,000 - 25%*75,000
= 56,250
Year 3
Book value = 56,250 - 25%*56,250
= 42,187.50
Year 4
Book value = 42,187.50 - 25%*42,187.50
= 31,640.625
Year 5
Book value = 32,640.625 - 25%*32,640.625
= 23,730.46
Year 6
Book value = 23,730.46 - 25%*23,730.46
=17,797.85
Therefore the asset will reach it's residual value in the 6th year as per The calculation above.
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