Gump Shrimp Company
On January 1, 2011, Gump Shrimp Company purchased a ship for $1,000,000. It has a ten-year useful life and a salvage value of $100,000. The company uses the double-declining-balance method.
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Refer to the information provided for Gump Shrimp Company. What was the book value of the ship at the end of the third year?
A) $128,000
B) $512,000
C) $200,000
D) Need more information to determine this answer.

Question

Gump Shrimp Company 
On January 1, 2011, Gump Shrimp Company purchased a ship for $1,000,000. It has a ten-year useful life and a salvage value of $100,000. The company uses the double-declining-balance method.
-
Refer to the information provided for Gump Shrimp Company. What was the book value of the ship at the end of the third year?
A) $128,000
B) $512,000
C) $200,000
D) Need more information to determine this answer.

Quizplus · Accepted Answer

The double-declining-balance method involves depreciating the asset at twice the straight-line rate. The straight-line rate is 10% (1/10 years), so the double-declining rate is 20%. Year 1 depreciation: $1,000,000 x 20% = $200,000. Year 2 depreciation: ($1,000,000 - $200,000) x 20% = $160,000. Year 3 depreciation: ($800,000 - $160,000) x 20% = $128,000. Book value at end of Year 3: $1,000,000 - $200,000 - $160,000 - $128,000 = $512,000.