A machine with a cost of $75,000 has an estimated residual value of $5,000 and an estimated life of four years or 18,000 hours. What is the amount of depreciation for the second full year, using the double-declining-balance method?
A) $17,500
B) $37,500
C) $18,750
D) $16,667

Question

Quizplus · Accepted Answer

To use the double-declining-balance method, we first calculate the straight-line depreciation rate:

Straight-line depreciation rate = (Cost - Residual value) / Estimated life 
Straight-line depreciation rate = ($75,000 - $5,000) / 4 = $17,500 per year

The double-declining-balance method uses a rate that is twice the straight-line rate, so:

Double-declining-balance rate = 2 x Straight-line depreciation rate 
Double-declining-balance rate = 2 x $17,500 = $35,000 per year

For the second year, we apply this rate to the remaining book value (cost - accumulated depreciation) at the beginning of the year:

Book value at beginning of year 2 = $75,000 - straight-line depreciation for year 1 
Book value at beginning of year 2 = $75,000 - $17,500 = $57,500

Accumulated depreciation at beginning of year 2 = straight-line depreciation for year 1 
Accumulated depreciation at beginning of year 2 = $17,500

Depreciation expense for year 2 = double-declining-balance rate x book value at beginning of year 2 
Depreciation expense for year 2 = $35,000 x $57,500 / $75,000 = $26,667

Therefore, the amount of depreciation for the second full year using the double-declining-balance method is $26,667, which is closest to answer choice C ($18,750). None of the other answer choices are close to this amount, so the best choice is C.

A Machine with a Cost of $75,000 Has an Estimated