A company purchased factory equipment for P250,000. It is estimated that the equipment will have a P25,000 salvage value at the end of its estimated 5-year useful life. If the company uses the double-declining-balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be
Question
A company purchased factory equipment for P250,000. It is estimated that the equipment will have a P25,000 salvage value at the end of its estimated 5-year useful life. If the company uses the double-declining-balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be
Solution
To calculate the annual depreciation using the double-declining-balance method, follow these steps:
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Determine the straight-line depreciation rate. This is done by dividing 1 by the useful life of the asset. In this case, 1 / 5 = 0.2 or 20%.
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Double the straight-line rate. So, 20% * 2 = 40%.
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Apply this rate to the book value of the asset at the beginning of the year. The book value is the initial cost of the asset minus any depreciation already recorded. In the first year, the book value is the initial cost, so the depreciation is P250,000 * 40% = P100,000.
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In the second year, the book value is the initial cost minus the first year's depreciation. So, P250,000 - P100,000 = P150,000. The second year's depreciation is then P150,000 * 40% = P60,000.
So, the amount of annual depreciation recorded for the second year after purchase would be P60,000.
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