Question

A company purchased a computer system at a cost of $40,000. The estimated useful life is 10 years, and the estimated residual value is $5,000. Assuming the company uses the double-declining-balance method, what is the depreciation expense for the second year?

Answer 1

The depreciation expense for the second year using the double-declining-balance method is $6,400, calculated by applying a rate of 20% to the book value of the computer system at the beginning of the second year, which is $32,000.

Step-by-step explanation:

The depreciation expense for the second year using the double-declining-balance method can be calculated by following these steps:

Subtract the residual value from the cost to find the depreciable base: $40,000 (cost) - $5,000 (residual value) = $35,000.

Calculate the depreciation rate: 2 x (1/10) = 0.2 or 20% (since it is the double-declining-balance method).

Apply the depreciation rate to the book value at the beginning of the second year. The book value at the beginning of the second year is the cost minus the first year's depreciation. In the first year, the depreciation would be 20% of $40,000, which is $8,000. This makes the book value at the beginning of the second year $32,000 ($40,000 - $8,000).

Calculate the second year's depreciation: 20% of $32,000 = $6,400.

Answer 2

The depreciation expense for the second year is $5,600

Step-by-step explanation:

Under the straight-line method, useful life is 10 years, so the asset's annual depreciation will be 10% of the Depreciable cost.

Depreciable cost = Total asset cost - salvage value = $40,000-$5,000 = $35,000

Under the double-declining-balance method the 10% straight line rate is doubled to 20% - multiplied times the Depreciable cost's book value at the beginning of the year.

In the first year, depreciation expense = 20% x $35,000 = $7,000

At the beginning of the second year, the Depreciable cost's book value is $35,000-$7,000 = $28,000

Depreciation expense in second year = 20% x $28,000 = $5,600