Question

On June 1, 2016, Bagby Co. purchased a new car for $36,000 with a useful life of eight years and a residual value of $4,800. If the company used double-declining-balance depreciation computed to the nearest whole year, depreciation expense for 2017 was

a. $6,750.00
b. $7,687.50
c. $5,250.00
d. $5,850.00

Answer 1

The correct answer is a which is $ 6,750

Step-by-step explanation:

Determine the depreciation base

The depreciation base = Acquisition cost - Residual/Salvage value.

The depreciation base = 36,000 - 4,800.

The depreciation base = $31,200.

Determining the depreciation rate

The depreciation rate = depreciation base / Useful life

The depreciation rate = 31,200/8

The depreciation rate = $ 3,900.

To determine depreciation rate %

Depreciation rate % = (The depreciation rate / depreciation base) × 100

Depreciation rate % = 12.5 %

Since Bagby Co. uses double declining balance depreciation, the correct depreciation rate % is 12.5 × 2= 25%

Determining the depreciation expense for 2017

2017's depreciation expense is computed as:

(Acquisition cost - 2016's depreciation expense) × Depreciation % rate

2016's depreciation expense is computed as:

Acquisition cost × Depreciation % rate = 36,000 × 25%

2016's depreciation expense = $9,000.

Therefore 2017's depreciation expense = (36,000 - 9,000) × 25%

Therefore 2017's depreciation expense = $ 6,750.