On September 1, 2013, Sitco Limited purchased an asset for $9,000, with a $1,500 estimated residual value, and an 8-year useful life. The 2013 depreciation expense using the double-declining-balance method would be:
A) $2,250
B) $625
C) $750
D) $1,875

Question

Quizplus · Accepted Answer

Step 1: Calculate the depreciation rate
Depreciation rate using double-declining-balance method = 2 x (100% / useful life)
Depreciation rate = 2 x (100% / 8) = 25%

Step 2: Calculate the 2013 depreciation expense
Year 1 depreciation expense = Beginning book value x depreciation rate
Beginning book value = Cost - Accumulated Depreciation
Accumulated Depreciation = $0 (First year of ownership)

Year 1 depreciation expense = ($9,000 - $0 - $1,500) x 25% = $1,125
However, since double-declining-balance method depreciates more in the early years, we need to limit the depreciation expense to the maximum amount that will reduce the book value to the estimated residual value.

Maximum depreciation for Year 1 = Beginning book value - Estimated residual value
Maximum depreciation for Year 1 = $9,000 - $1,500 = $7,500

Since $1,125 exceeds $750, which will bring the book value down to $7,500, the maximum depreciation for Year 1 using double-declining-balance method is $750.

On September 1, 2013, Sitco Limited Purchased an Asset for $9,000