Cost of an asset is $1,070,000 and its residual value is $220,000.Estimated useful life of the asset is five years.Calculate depreciation for the first year using the reducing-balance method of depreciation.

Question

Quizplus · Accepted Answer

In reducing-balance method, depreciation is calculated by applying a fixed percentage on the asset's book value. The formula to calculate depreciation per year using reducing balance method is: 
Depreciation = Book value at the beginning of the year x Depreciation rate
Depreciation rate = 1 / Estimated useful life x 2
In the first year, the book value of the asset would be $1,070,000 (cost - accumulated depreciation of previous years) and the depreciation rate would be 1/5 x 2 = 0.4 
Depreciation for the first year = $1,070,000 x 0.4 = $428,000
Therefore, the correct answer is option C.

Cost of an Asset Is $1,070,000 and Its Residual Value