A machine that cost $400,000 has an estimated residual value of $40,000 and an estimated useful life of four years. The company uses double-declining-balance depreciation. Required:Calculate its book value at the end of year 3
Question
A machine that cost 40,000 and an estimated useful life of four years. The company uses double-declining-balance depreciation. Required:Calculate its book value at the end of year 3
Solution
To calculate the book value at the end of year 3 using the double-declining-balance depreciation method, follow these steps:
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Determine the depreciation rate: The double-declining-balance method doubles the straight-line depreciation rate. The straight-line depreciation rate is 1 divided by the useful life of the asset. In this case, it's 1/4 = 0.25. Doubling this gives us a depreciation rate of 0.25 * 2 = 0.50 or 50%.
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Calculate the annual depreciation for each year: Multiply the book value at the beginning of each year by the depreciation rate.
Year 1: 200,000 Year 2: (200,000) * 0.50 = 200,000 - 50,000
- Calculate the book value at the end of each year: Subtract the annual depreciation from the book value at the beginning of each year.
Year 1: 200,000 = 200,000 - 100,000 Year 3: 50,000 = $50,000
So, the book value of the machine at the end of year 3 is $50,000.
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