On October 1, 2018, Holt Company places a new asset into service. The cost of the asset is $120,000 with an estimated 5-year life and $30,000 salvage value at the end of its useful life. What is the book value of the plant asset on the December 31, 2018, balance sheet assuming that Holt Company uses the double-declining-balance method of depreciation?

Question

Quizplus · Accepted Answer

Double-declining-balance method of depreciation is an accelerated depreciation method that applies a constant double rate to the declining book value of an asset. The formula to calculate depreciation using double-declining-balance method is:

Depreciation Expense = Beginning Book Value x Double-declining-balance rate

Double-declining-balance rate = (1 / Useful life) x 2

For the first year, the calculation would be:
Double-declining-balance rate = (1 / 5) x 2 = 40%
Depreciation Expense = $120,000 x 40% = $48,000
Accumulated Depreciation after year 1 = $48,000

Book value after year 1 = Cost - Accumulated Depreciation
Book value after year 1 = $120,000 - $48,000 = $72,000

For the second year, the calculation would be:
Double-declining-balance rate = (1 / 5) x 2 = 40%
Depreciation Expense = $72,000 x 40% = $28,800
Accumulated Depreciation after year 2 = $48,000 + $28,800 = $76,800

Book value after year 2 = Cost - Accumulated Depreciation
Book value after year 2 = $120,000 - $76,800 = $43,200

Since there is a salvage value of $30,000, the asset cannot be depreciated below this value. Therefore, the last year's depreciation is adjusted accordingly. For the fifth year, the calculation would be:
Depreciation Expense = Book value at the beginning of the year - Salvage value
Depreciation Expense = $30,000 - $43,200 = $0

So, the total accumulated depreciation for the asset would be $76,800 at the end of year 4, and the book value would be $43,200. Therefore, the book value of the plant asset on the December 31, 2018 balance sheet would be:
Book value = Cost - Accumulated Depreciation
Book value = $120,000 - $76,800 = $43,200
Hence, the correct answer is C) $108,000 because the book value of the asset is calculated at the end of the first year, whereas the depreciation in the second year is not complete.

On October 1, 2018, Holt Company Places a New Asset