Question

Company A and Company B both purchased a $100,000 machine with an estimated useful life of 10 years. Company A uses straight-line and Company B uses double-declining balance. At the end of the 3rd year, both sell the machines for the exact same amount. Since different depreciation methods were used, the entry to record the disposal will result in different amounts of _____.

Answer 1

The entry to record the disposal will result in different amounts of remaining book value.

Step-by-step explanation:

When Company A uses the straight-line method, the depreciation expense is calculated by dividing the cost of the machine by its useful life. In this case, the annual depreciation expense would be $10,000 ($100,000 / 10 years). After 3 years, the accumulated depreciation would be $30,000 ($10,000 x 3 years).

On the other hand, when Company B uses the double-declining balance method, the depreciation expense is calculated as a percentage of the asset's carrying value. The percentage is determined by doubling the straight-line rate. In this case, the straight-line rate is 10% (100% / 10 years) and the double-declining balance rate is 20% (10% x 2). After 3 years, the accumulated depreciation using the double-declining balance method would be $48,000 ($100,000 x 20% x 3 years).

When both companies sell the machines, they will record the disposal by removing the cost of the machine and the accumulated depreciation from their books. Since the accumulated depreciation is different for each company ($30,000 for Company A and $48,000 for Company B), the entry to record the disposal will result in different amounts of remaining book value. The remaining book value is the difference between the cost of the machine and the accumulated depreciation. Therefore, the answer is remaining book value.