Question

Equipment costing $86,000 was purchased by Spence, Inc., 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. (Do not round your intermediate calculations. Round your answers to the nearest dollar amount.)

Year 1 Year 2

Double-Declining Balance Depriciation ___________ ____________

150% Declining-Balance Depriciation _____________ ____________

Excess of Double Declining-Balance over 150% Declining- balance _________ __________

Answer 1

To compare the two alternative rates of depreciation, calculate the depreciation expense for each rate. Multiply the annual depreciation expense by the respective year to get the depreciation expense for the first two years. Subtract the depreciation expenses of 150% declining-balance from double-declining balance to find the excess.

Step-by-step explanation:

To compare the two alternative rates of depreciation, we first need to calculate the depreciation expense for each rate. The double-declining balance method is calculated by taking the straight-line rate and doubling it. The 150% declining-balance method is calculated by taking 150% of the straight-line rate. The straight-line rate is calculated by dividing the cost of the equipment by its useful life.

For the double-declining balance method: Annual depreciation expense = ($86,000 / 8) x 2 = $21,500

For the 150% declining-balance method: Annual depreciation expense = ($86,000 / 8) x 1.5 = $12,750

To compare the first two years, we simply multiply the annual depreciation expense by the respective year. For Year 1, multiply by 1 and for Year 2, multiply by 2.

Double-Declining Balance Depreciation: Year 1 = $21,500, Year 2 = $43,000

150% Declining-Balance Depreciation: Year 1 = $12,750, Year 2 = $25,500

To find the excess of double declining-balance over 150% declining-balance, subtract the depreciation expenses of 150% declining-balance from double-declining balance for each year.

Excess of Double Declining-Balance over 150% Declining-Balance: Year 1 = $21,500 - $12,750 = $8,750, Year 2 = $43,000 - $25,500 = $17,500