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Tory Enterprises pays $238,400 for equipment that will last five years and have a $43,600 salvage value. By using the equipment in its operations for five years, the company expects to earn $88,500 annually, after deducting all expenses except depreciation. (Round your answers to the nearest whole dollar.)

Calculate annual depreciation expenses using double-declining-balance method.

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Answer:

Depreciation is defined as a fall or decline in the value of an asset due to normal wear and tear or efflux of time.

  • Depreciation as per straight line method =  [tex]\frac{Original\ Cost - Salvage\ Value}{Useful\ Life }[/tex]
  • Depreciation to be written off every year = [tex]\frac{238,400 - 43,600}{5\ years}[/tex]

           = $38,960

  • Hence rate of depreciation under straight line method (SLM) = $38960/$238,400= 16.34% per annum
  • Rate of depreciation as per double declining method = 2 × rate of depreciation as per SLM

                            = 2 × 16.34%= 32.68%

Under the double-declining method, depreciation expense each year= double-declining rate in percent × book value of the asset at the beginning of each year

  • Depreciation for first year= 32.68% × 238400= $77,909
  • Depreciation for year 2 = 32.68% of  (238,400- 77,909 )= $52,448
  • Year 3= 32.68% of (238,400- 77,909-52448)= $35,308
  • Year 4= 32.68% of (238,400-77,909-52,448-35,308)= $23,770
  • Year 5= 32.68% of (238,400- 77,909-52,448-35308-23770)= $16,001

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