Question

On October 1, 2014, Hess Company places a new asset into service. The cost of the asset is $80,000 with an estimated 5-year life and $20,000 salvage value at the end of its useful life. What is the book value of the plant asset on the December 31, 2014, balance sheet assuming that Hess Company uses the double-declining-balance method of depreciation?

Answer 1

Straight-line depreciation rate = 100% / Estimated useful life = 100% / 5 years = 20%

Double-declining depreciation rate = Straight-line depreciation rate * 2 = 20% * 2 = 40%

Depreciation for first year = Cost * Double declining depreciation rate = $80,000 * 40% = $32,000

Depreciation for year 2014 will be for 3 months ( i.e. from October 1, 2014 to December 31, 2014 ) = Depreciation for first year * 3/12 = $32,000 * 3/12 = $8,000

Cost of the plant	$80,000
(-) Depreciation for 3 months	( $8,000 )
Book value of the plant on December 31, 2014	$72,000