Question

II. Assume that a machine is costing $300,000 and having a useful life of five years (with no salvage value).Required:
a. Compute depreciation for year 1 and year 2 using

 Straight line

 double declining balance
b. Compute average useful life of the asset for year 1 using straight line depreciation
c. If double declining balance is used to compute the depreciation, how much gain or loss is reported at the end of year 2

if the sales price of the asset is

 $150,000 cash

 $ 200,000 cash

 $120,000 cash

Answer 1

a)

Cost of the machine = 300,000

Useful life = 5 years

Scrap value = 0

Depreciation (straight line)

= Cost / Useful life

= 300,000 / 5

= 60,000

Depreciation rate (double declining method)

= 2 x [rate of depreciation (straight line)]

= 2 x [(depreciation per year / cost) x 100]

= 2 x [(60,000 / 300,000) x 100]

= 2 x 20%

= 40% (double declining depreciation rate)

Depreciation (double declining)

= 300,000 x 40% = 120,000 (year 1) = 180,000

= 180,000 x 40% = 72,000 (year 2) = 108,000

c)

• 150,000 - 108,000 = 42,000 Gain
• 200,000 - 108,000 = 92,000 Gain
• 120,000 - 108,000 = 12,000 Gain