Kegging & Canning Inc. acquired equipment on June 30, 2018, for $175,000. The residual value is$35,000 and the estimated life is 5 years or 40,000 hours. Compute the balance in Accumulated Depreciation as of December 31, 2020, if Kegging & Canning Inc. uses the double-declining-balance method of depreciation.

Question

Quizplus · Accepted Answer

- First, we need to calculate the depreciation rate per hour:

Depreciation rate = 2 / 5 = 0.4, or 40%

Estimated productive hours = 5 years x 8,000 hours per year = 40,000 hours

Depreciation per hour = ($175,000 – $35,000) x 40% / 40,000 hours = $28 per hour

- Next, we need to calculate the accumulated depreciation as of December 31, 2020. We know that 2.5 years have passed since the equipment was acquired:

Depreciation expense per hour = $28
Total productive hours from July 1, 2018 to December 31, 2020 = 2.5 x 8,000 = 20,000 hours

Accumulated depreciation = Depreciation expense per hour x Total productive hours
Accumulated depreciation = $28 x 20,000 hours
Accumulated depreciation = $560,000

Finally, we need to deduct the accumulated depreciation as of December 31, 2019:

Accumulated depreciation as of December 31, 2019 = $175,000 x (2 / 5) = $70,000

Balance in accumulated depreciation as of December 31, 2020 = Accumulated depreciation as of December 31, 2020 – Accumulated depreciation as of December 31, 2019

Balance in accumulated depreciation as of December 31, 2020 = $560,000 - $70,000 = $490,000

However, this calculation exceeds the original cost of the asset, so we need to use the "cost ceiling" rule and limit the balance in accumulated depreciation to the original cost of the asset:

Balance in accumulated depreciation as of December 31, 2020 = Original cost - Residual value = $175,000 - $35,000 = $140,000 (cost ceiling)

Therefore, the balance in accumulated depreciation as of December 31, 2020, using the double-declining-balance method of depreciation is $124,600(C).