Question

A company purchased factory equipment for $560,000. It is estimated that the equipment will have a $65,000 salvage value at the end of its estimated 5-year useful life. If the company uses the double-declining balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be:

a. $87,360.
b. 224,000.
c. $134,400.
d. $198,000.

Answer 1

To calculate the second year's depreciation using the double-declining balance method, first calculate the first year's depreciation and subtract it from the initial cost. Then, apply the double-declining rate to the new book value to get the second year's depreciation of $134,400. Option C is correct.

Step-by-step explanation:

The question is asking about the calculation of depreciation using the double-declining balance method. First, we calculate the straight-line depreciation rate, which is 1 divided by the useful life of the asset. In this case, it's 1/5 or 20%. Then, double this rate for the double-declining balance method, which becomes 40%.

Next, apply this rate to the book value of the equipment at the beginning of the second year. Since our initial cost is $560,000, and we subtract the first year's depreciation (40% of $560,000), the book value at the beginning of the second year is $336,000. Now, applying the 40% rate to this value gives us the second year's depreciation amount.

First-Year Depreciation: $560,000 * 40% = $224,000.

Book Value at Beginning of Second Year: $560,000 - $224,000 = $336,000.

Second-Year Depreciation: $336,000 * 40% = $134,400.

Therefore, the correct answer would be option c, $134,400.