Question

On July 1, 2020, Swifty Company purchased for $6,120,000 snow-making equipment having an estimated useful life of 5 years with an estimated salvage value of $255,000. Depreciation is taken for the portion of the year the asset is used. Complete the form below by determining the depreciation expense and year-end book values for 2020 and 2021 using the

1. sum-of-the-years'-digits method.
2. double-declining balance method.
2020 2021
Sum-of-the-Years'-Digits Method
Equipment $6,120,000 $6,120,000
Less: Accumulated Depreciation
Year-End Book Value
Depreciation Expense for the Year
Double-Declining Balance Method
Equipment $6,120,000 $6,120,000
Less: Accumulated Depreciation
Year-End Book Value
Depreciation Expense for the Year
Assume the company had used stright line depreciation during 2020 and 2021. During 2022, the company determined that the equiptment would be useful to the company for only one more year beyond 2022. Salvage value is estimated at 20000. Compute the amount of depreciation expense for the 2022 income statement.
Assume the company had used straight-line depreciation during 2020 and 2021. During 2022, the company determined that the equipment would be useful to the company for only one more year beyond 2022. Salvage value is estimated at $340,000. What is the depreciation base of this asset?

Answer 1

Swifty Company

1. Sum-of-the-years'-digits method:

2020 2021

Equipment $6,120,000 $6,120,000

Less: Accumulated Depreciation 977,500 2,541,500

Year-End Book Value $5,143,500 $3,578,500

Depreciation Expense for the Year 977,500 $1,564,000

2. Double-declining balance method:

2020 2021

Equipment $6,120,000 $6,120,000

Less: Accumulated Depreciation 1,224,000 3,182,400

Year-End Book Value $4,896,000 $2,937,600

Depreciation Expense for the Year 1,224,000 $1,958,400

Straight-line Method:

3. The amount of depreciation expense for the 2022 income statement is:

= $2,170,250.

4. In 2022, the depreciation base of this asset is:

= $4,020,500

Step-by-step explanation:

a) Data and Calculations:

July 1, 2020: Cost of snowmaking equipment = $6,120,000

Estimated salvage value of the equipment = 255,000

Depreciable amount of the equipment = $5,865,000

Estimated useful life of the equipment = 5 years

Annual depreciation expense = $1,173,000 ($5,865,000/5)

Sum-of-the-Years'-Digits Method =15 (5+4+3+2+1)

Calculation of depreciation expense:

2020 = $977,500 (5/15 * $5,865,000)/2

2021 = $1,564,000 (4/15 * $5,865,000)

2020 2021

Equipment $6,120,000 $6,120,000

Less: Accumulated Depreciation 977,500 2,541,500

Year-End Book Value $5,143,500 $3,578,500

Depreciation Expense for the Year 977,500 $1,564,000

Double-Declining Balance Method (100/5 * 2) = 40%

Calculation of depreciation expense:

2020 = $1,224,000 (40% * $6,120,000)/2

2021 = $1,958,400 (40% * $4,896,000)

2020 2021

Equipment $6,120,000 $6,120,000

Less: Accumulated Depreciation 1,224,000 3,182,400

Year-End Book Value $4,896,000 $2,937,600

Depreciation Expense for the Year 1,224,000 $1,958,400

Straight-line method:

Annual depreciation expense = $1,173,000

2020: Depreciation expense = $586,500

2021: Depreciation expense = $1,173,000

2022: Depreciable amount = $4,340,500 ($4,360,500 - $20,000)

Depreciation expense = $2,170,250 ($4,340,500/2)

2020 2021 2022

Equipment $6,120,000 $6,120,000 $6,120,000

Less: Accumulated Depreciation 586,500 1,759,500 3,929,750

Year-End Book Value $5,533,500 $4,360,500 $2,190,250

Depreciation Expense for the Year 586,500 1,173,000 2,170,250

Straight-line method:

Annual depreciation expense = $1,173,000

2020: Depreciation expense = $586,500

2021:

Depreciation expense = $1,173,000

Accumulated depreciation = $1,759,500 ($586,500 + $1,173,000)

Year-End Book Value $4,360,500 ($6,120,000 - $1,759,500)

2022 Estimated Salvage Value = $340,000

2022: Depreciation basis = $4,020,500 ($4,360,500 - $340,000)

Depreciation expense = $2,010,250 ($4,020,500/2)