Question

On January 1, 20X1, the Holloran Corporation purchased a machine at a cost of $55,000. The machine was expected to have a service life of 10 years and a $5,000 residual value. The straight-line depreciation method was used. In 20X3, the company switched to the double-declining-balance depreciation method. Depreciation for 20X3 should be:Multiple Choice$12,750$10,000$11,250$8,500

Answer 1

The answer is $11250

Step-by-step explanation:

Depreciation is used to depict the loss of value in an asset once it has been purchased. In this case, the machine's value at the end of 20X1 is $55000 less the depreciated amount. There are many methods of calculating depreciation. Holloran uses straight line for 20X1 and 20X2 then changes to the double declining method in 20X3.

To compute depreciation using the straight line method:

(Cost of asset - residual value)/duration of use

Accumulated depreciation for 20X1 and 20X2 is: (($55000-$5000)/10) * 2 =$ 10,000

To compute depreciation using the double declining method:

2 * depreciation rate * Book value (cost of asset less depreciation) at the beginning of the period.

At the beginning of 20X3, the book value of the machine is $45,000 ($55,000 - $10,000) and the remaining useful life is 8 years, therefore the depreciation rate = (100/8) = 12.5%.

To calculate depreciation for 20X3 on the double declining method: 2*12.5%*$45000 = $11,250

Answer 2

The correct answer is C.

Step-by-step explanation:

Giving the following information:

On January 1, 20X1, the Holloran Corporation purchased a machine for $55,000. The machine was expected to have a service life of 10 years and a $5,000 residual value. The straight-line depreciation method was used. In 20X3, the company switched to the double-declining-balance depreciation method.

Accumulated depreciation= (50,000/10)*2= 10,000

Annual depreciation= 2*[(book value)/estimated life (years)]

Annual depreciation= (45,000/8)*2= $11,250