Question

an asset has a cost of $62,897 and an estimated salvage value of $5000. if the company uses double declining balance depreciation method, and the asset is estimated to have a four year life, what is the amount of depreciation expense in year four of the asset's life?

Answer 1

In the fourth year using the double declining balance depreciation method, for an asset with a $62,897 cost and a $5,000 salvage value over four years, the depreciation expense would be $498.37, because by then the cumulative depreciation has nearly reached the asset's cost less the salvage value.

Step-by-step explanation:

To calculate the fourth year depreciation expense using the double declining balance method for an asset costing $62,897 with a salvage value of $5,000 and a life of four years, we need to follow these steps:

1. Calculate the straight-line depreciation rate, which would be 1 divided by the useful life of the asset, so 1/4 or 25%.
2. Double the straight-line rate to get the double declining balance rate, which is 2 x 25% = 50%.
3. Apply the 50% rate to the book value at the beginning of each year to determine the annual depreciation expense, but not below the salvage value.

For the first three years, we calculate the depreciation as follows:

• Year 1: $62,897 (cost) x 50% = $31,448.50 depreciation expense
• Year 2: ($62,897 - $31,448.50) x 50% = $15,724.25 depreciation expense
• Year 3: ($62,897 - $31,448.50 - $15,724.25) x 50% = $7,862.13 depreciation expense

By Year 4, the sum of the depreciation (already $54,035.88) is near the asset's cost less its salvage value. The remaining book value at the beginning of year 4, $5,498.37 ($62,897 - $31,448.50 - $15,724.25 - $7,862.13), is just slightly above the salvage value.

Thus, the depreciation expense for year 4 would be the difference between the book value at the start of year 4 and the salvage value: $5,498.37 - $5000 = $498.37.