demonstration problem chapter 6 – exercise 13 depreciation calculation methods accounting what the...

Demonstration Problem

Chapter 6 – Exercise 13

Depreciation Calculation Methods

AccountingWhat the Numbers Mean 10e

Problem Definition

Millco, Inc., acquired a machine that cost $400,000 early

in 2013. The machine is expected to last for eight years,

and its estimated salvage value at the end of its life is

$60,000.

Problem Definition

a. Using straight-line depreciation, calculate the depreciation expense to be recognized in the first year of the machine’s life and calculate the accumulated depreciation after the fifth year of the machine’s life.

b. Using declining balance depreciation at twice the straight-line rate, calculate the depreciation expense for the third year of the machine’s life.

c. What will be the net book value of the machine at the end of its eighth year of use before it is disposed of, under each depreciation method?

Problem Solution

a. Amount to be depreciated =

Problem Solution


Cost – Salvage Value

Problem Solution



Annual depreciation expense =

Problem Solution




Amount to be depreciated /

Useful Life

Problem Solution




Amount to be depreciated / Useful Life


Problem Solution






($400,000 - $60,000) / 8 =

Problem Solution

a. Amount to be depreciated = Cost – Salvage Value Annual depreciation expense = Amount to be depreciated / Useful Life Annual depreciation expense = ($400,000 - $60,000) / 8 = $42,500 per year

Problem Solution






($400,000 - $60,000) / 8 = $42,500 per year

After 5 years, accumulated depreciation =

Problem Solution






($400,000 - $60,000) / 8 = $42,500 per year


$42,500 * 5 years =

Problem Solution






($400,000 - $60,000) / 8 = $42,500 per year


$42,500 * 5 years = $212,500

Problem Definition




Problem Solution

b. Straight-line rate =

Problem Solution

b. Straight-line rate = 1/8

Problem Solution

b. Straight-line rate = 1/8 = 12.5%.

Problem Solution


Double-declining rate =

Problem Solution


Double-declining rate = 12.5% * 2

Problem Solution


Double-declining rate = 12.5% * 2 = 25%

Problem Solution



At End of Year

Net Book Value Depreciation Accumulated Net Book

Year at Beginning of Year Expense Depreciation Value

Solution approach: Set up columns to gather the data needed to calculate the depreciation expense, accumulated depreciation, and net book value at the beginning and end of each year.

Problem Solution



At End of Year



1 $400,000

The Net Book Value at the Beginning of Year One is equal to the purchase price of the asset.

Problem Solution



At End of Year



1 $400,000 $400,000 * 25% = $100,000

Depreciation expense = Net Book Value at Beginning of Year * Double-declining rate.

Problem Solution



At End of Year



1 $400,000 $400,000 * 25% = $100,000 $100,000

Accumulated depreciation = The sum of the depreciation expense of all prior years.

Problem Solution



At End of Year



1 $400,000 $400,000 * 25% = $100,000 $100,000 $300,000

Net Book Value at the End of Year = Cost of the Asset (or $400,000) – Accumulated Depreciation

Problem Solution



At End of Year



1 $400,000 $400,000 * 25% = $100,000 $100,000 $300,000

2 300,000

Net Book Value at Beginning of Year Two = Net Book Value at End of Year One

Problem Solution



At End of Year



1 $400,000 $400,000 * 25% = $100,000 $100,000 $300,000

2 300,000 300,000 * 25% = 75,000

Depreciation Expense = Net Book Value at Beginning of Year * Double-declining date

Problem Solution



At End of Year



1 $400,000 $400,000 * 25% = $100,000 $100,000 $300,000

2 300,000 300,000 * 25% = 75,000 175,000

Accumulated depreciation = The sum of the depreciation expense of all prior years = $100,000 + $75,000 = $175,000

Problem Solution



At End of Year



1 $400,000 $400,000 * 25% = $100,000 $100,000 $300,000

2 300,000 300,000 * 25% = 75,000 175,000 225,000

Net Book Value at the End of Year = Cost of the Asset (or $400,000) – Accumulated Depreciation

Problem Solution



At End of Year



1 $400,000 $400,000 * 25% = $100,000 $100,000 $300,000

2 300,000 300,000 * 25% = 75,000 175,000 225,000

3 225,000 225,000 * 25% = 56,250 231,250 168,750

Depreciation expense for the third year of the asset’s life = $56,250.

Problem Definition




Problem Solution

c. Net book value =

Problem Solution

c. Net book value = Cost – Accumulated depreciation

Problem Solution


After 8 years, the asset will have been fully depreciated to its estimated salvage value of $60,000 under each method.

Problem Solution


After 8 years, the asset will have been fully depreciated to its estimated salvage value of $60,000 under each method.

Accumulated depreciation will be $340,000, and net book value will be $60,000.

$400,000 - $340,000 = $60,000

AccountingWhat the Numbers Mean 10e

David H. MarshallWayne W. McManus

Daniel F. Viele

You should now have a better understandingof depreciation calculation methods.

Remember that there is a demonstration problem for each chapter that is here for your learning benefit.

demonstration problem chapter 6 – exercise 13 depreciation calculation methods accounting what the...

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