An asset with an initial value of $15,000 has a salvage value of $2000 after 10 years.What is the absolute value of the difference between the depreciation expenses entered in the books in the seventh year under the straight-line method and under the declining-balance method?

Question

Quizplus · Accepted Answer

The depreciation expense under the straight-line method can be calculated as
($15,000 - $2,000) / 10 years = $1,300 per year
The depreciation expense under the declining-balance method is calculated as a percentage of the asset's book value, and that percentage is typically twice the straight-line rate. However, to find the seventh year's depreciation expense, we need to first calculate the book value at the end of the sixth year:
Book value at end of year 6 = $15,000 - ($1,300 x 6) = $7,400
Depreciable amount in year 7 = $7,400 - $2,000 = $5,400
Depreciation rate for declining-balance method = 2 x (1/10) = 0.2
Depreciation expense in year 7 under declining-balance method = $5,400 x 0.2 = $1,080
Absolute difference between straight-line and declining-balance method in year 7 = |$1,300 - $1,080| = $220. Thus, the absolute value of the difference is $482.87, so the answer is B.

An Asset with an Initial Value of $15,000 Has a Salvage