Question

1. (NOTE: You do not need a cash flow diagram for this problem.) Chemcut Corporation purchased new office furniture with an estimated useful life of 12 years. Cost of the furniture was $25,000 and the salvage value was estimated to be $2200 at the end of its useful like.

a) For your company financial records, you use the 200% declining-balance depreciation method. What is the depreciation amount you would record in your company financial records for the 3rd year of the asset’s life?

b) If instead you use the straight-line method of depreciation, what would be the depreciation amount you would record in you company financial records for the 3rd year of the asset’s life? How much depreciation would you record in the 12th year of the asset’s life?

Answer in format below (Please) Please show all work:

1. Cash flow diagram of your problem (unless stated otherwise)

2. Specify the model/equation used [e.g. P=F(1+i)-N ]

3. Specify the values of each parameter [e.g. i=0.05 or 5% ]

4. Show your work for how you calculate your numerical results.

5. Report dollar value with cents (e.g. $253.12),

6. Answer the question of the problem with a complete sentence that includes your numerical justification.

Answer 1

a. Straight line depreictaion % = 1/12 = 0.08333 = 8.33%

Declining rate = 2*8.33% = 16.67%

Depreciation in year 1 = 16.67%*25,000 = 4,166.67

Depreciation in year 2:

Book Value = 25000 -4166.67 = 20,833.33

Depreciation in year 2 = 16.67%*20,833.33 = 3,472.22

Depreciation in year 3:

Book Value = 20,833.33 -3472.22 =17,361.11

Depreciation in 3rd year = 17.361.11*16.67% = $2,893.52

b. If a straight linfe method is used. Depreciation year year = (25,000 -2,200) = 22,800/12 = 1,900 each year

Depreciation in 3rd year =1,900

Depreciation in 12th year = 1,900

Same value each of the 12 years.