Question

Equipment costing $86,000 was purchased by Spence, Incorporated, at the beginning of the current year. The company will depreciate the equipment by the declining-balance method, but it has not determined whether the rate will be at 150 percent or 200 percent of the straight-line rate. The estimated useful life of the equipment is eight years. Prepare a comparison of the two alternative rates for management for the first two years Spence owns the equipment, assuming no salvage value at the end of eight years. Note: Do not round your intermediate calculations. Round your answers to the nearest dollar amount.

Answer 1

The depreciation expense for the first two years using the 150% declining-balance rate is $21,500 and $19,350, and using the 200% declining-balance rate is $28,666.67 and $20,523.81.

To compare the two alternative depreciation rates (150% and 200% declining-balance) for the equipment purchased by Spence, Incorporated, we can use the following formula for declining-balance depreciation:

Depreciation Expense=Beginning Book Value×Declining-Balance Rate

The declining-balance rate is a multiple of the straight-line rate. For the 150% rate, it's 1.5 times the straight-line rate, and for the 200% rate, it's 2 times the straight-line rate.

Given that the equipment cost $86,000 and has an estimated useful life of 8 years with no salvage value, the straight-line rate is 1/8 or 12.5%.

For the 150% declining-balance rate:

Depreciation Expense Year 1=86,000×1.5×12.5%

Depreciation Expense Year 2=(Beginning Book Value Year 1−Depreciation Expense Year 1)×1.5×12.5%

For the 200% declining-balance rate:

Depreciation Expense Year 1=86,000×2×12.5%

Depreciation Expense Year 2=(Beginning Book Value Year 1−Depreciation Expense Year 1)×2×12.5%

Calculating these values gives us the depreciation expenses for the first two years under both rates, which are $21,500 and $19,350 for the 150% rate, and $28,666.67 and $20,523.81 for the 200% rate. These values can then be presented in a comparison for management decision-making.