Question

On April 1, 2016, Cyclone’s Backhoe Co. purchases a trencher for \(280,000. The machine is expected to last five years and have a salvage value of \)40,000. Compute depreciation expense for both 2016 and 2017 assuming the company uses the double-declining-balance method.

Short answer

The depreciation expense in 2016 is $84,000 and the depreciation expense in 2017 is $112,000.

Step-by-step solution

Partial-Year Depreciation

When an asset is purchased (or sold) at a time other than the beginning or the end of an accounting period, the depreciation is recorded for part of a year

Formula used in double-declining-method

$\mathbf{Straight}\mathbf{}\mathbf{line}\mathbf{}\mathbf{rate}\mathbf{=}\mathbf{100}\mathbf{\%}\mathbf{÷}\mathbf{Useful}\mathbf{}\mathbf{life}$

$\mathbf{Double}\mathbf{}\mathbf{declining}\mathbf{}\mathbf{balance}\mathbf{}\mathbf{rate}\mathbf{=}\mathbf{2}\mathbf{\times }\mathbf{Straught}\mathbf{}\mathbf{line}\mathbf{}\mathbf{rate}$

$\mathbf{Depriciation}\mathbf{}\mathbf{expense}\mathbf{=}\mathbf{Double}\mathbf{}\mathbf{declining}\mathbf{}\mathbf{balance}\mathbf{}\mathbf{rate}\mathbf{\times }\mathbf{Beginning}\mathbf{}\mathbf{period}\mathbf{}\mathbf{book}\mathbf{}\mathbf{value}$

Computation of depreciation

Depreciation for 2016 (from April to December):

$\begin{array}{rcl}\mathrm{Straight} \mathrm{line} \mathrm{rate}& =& 100\%÷5\mathrm{years}\\ & =& 20\%\end{array}$

$\begin{array}{rcl}\mathrm{Double} \mathrm{declining} \mathrm{balance} \mathrm{rate}& =& 2\times 20\%\\ & =& 40\%.\end{array}$

$\begin{array}{rcl}\mathrm{Depreciation}\mathrm{expense}& =& 40\%\times \$280,000\times \left(\frac{9}{12}\right)\\ & =& \left(\frac{40}{100}\right)\times 280,000\times \left(\frac{9}{12}\right)\\ & =& \$84,000.\end{array}$

Depreciation for 2017 (for 1year):

$\begin{array}{rcl}\mathrm{Depreciation}\mathrm{expense}& =& 40\%\times \$280,000\\ & =& \left(\frac{40}{100}\right)\times 280,000\\ & =& \$112,000.\end{array}$