Buggy Company purchased equipment on June 3, 2012, for $100,000. The residual value is zero and the estimated life is 10 years. Compute depreciation expense for the year ending December 31, 2012, if the company uses the double-declining method of depreciation.

Question

Quizplus · Accepted Answer

Under the double-declining method of depreciation, the annual depreciation rate is twice the straight-line rate.

First, we need to calculate the straight-line rate:

Straight-line rate = 1 / estimated life

Straight-line rate = 1 / 10 = 0.1 or 10%

The double-declining rate is twice the straight-line rate:

Double-declining rate = 2 x straight-line rate = 2 x 0.1 = 0.2 or 20%

To calculate the depreciation expense for the first year, we use the following formula:

Depreciation expense = Beginning book value x Depreciation rate

The beginning book value is the cost of the equipment, which is $100,000.

In the first year, the depreciation rate is 20%.

Depreciation expense = $100,000 x 0.2 = $20,000

However, we need to prorate the depreciation expense for the portion of the year that the asset was in service.

June 3 to December 31 is 211 days out of 365 days.

Prorated depreciation expense = $20,000 x (211/365) = $11,667

Therefore, the answer is B) $11,667.

Buggy Company Purchased Equipment on June 3, 2012, for $100,000