On April 13, 2006, Foley Co.purchased machinery for $120,000.Salvage value was estimated to be $5,000.The machinery will be depreciated over ten years using the double-declining balance method.If depreciation is computed on the basis of the nearest full month, Foley should record depreciation expense for 2007 on this machinery of

Question

Quizplus · Accepted Answer

The double-declining balance method uses a depreciation rate that is twice the straight-line rate.

Depreciation rate = 2 / useful life in years
Depreciation rate = 2 / 10 = 0.2 or 20%

First-year depreciation = book value at beginning of year x depreciation rate

Book value at beginning of year = cost - accumulated depreciation
Book value at beginning of year = $120,000 - $0 = $120,000

Depreciation expense for year 1 = $120,000 x 20% = $24,000

Since we are asked for the depreciation expense for 2007, which is year 2, we need to calculate the book value at the beginning of year 2.

Book value at beginning of year 2 = cost - accumulated depreciation at end of year 1

Accumulated depreciation at end of year 1 = first-year depreciation = $24,000

Book value at beginning of year 2 = $120,000 - $24,000 = $96,000

Second-year depreciation = book value at beginning of year 2 x depreciation rate

Second-year depreciation = $96,000 x 20% = $19,200

However, we are told to round to the nearest full month. Since one year equals 12 months, we need to divide $19,200 by 12 and multiply by the number of months in 2007 (which is 12 - 3 = 9).

Depreciation expense for 2007 = ($19,200 / 12) x 9 = $1,600 x 9 = $14,400

Therefore, the total depreciation recorded for the first two years is $24,000 + $14,400 = $38,400.

Depreciation for year 3 would be calculated based on a book value of $96,000 - $38,400 = $57,600.