Question

Becker Office Service purchased a new computer system in 2016 for $40,000. It is expected to have a five-year useful life and a $5,000 salvage value. The company expects to use the system more extensively in the early years of its life.

Required:
a. Calculate the depreciation expense for each of the five years, assuming the use of straight-line depreciation.
b. Calculate the depreciation expense for each of the five years, assuming the use of double-declining-balance depreciation.
c. Assume that Becker Office Service sold the computer system at the end of the fourth year for $15,000. Compute the amount of gain or loss using each depreciation method.

Answer 1

a. Calculate the depreciation expense for each of the five years, assuming the use of straight-line depreciation.

The formula is:

Straight-line depreciation: (cost of asset - salvage value) / useful life

Depreciation: ($40,000 - $5,000) / 5

Depreciation = $7,000 for each year

b. Calculate the depreciation expense for each of the five years, assuming the use of double-declining-balance depreciation.

The formula is:

2 X (Cost of asset / useful life )

2 X ($40,000 / 5 )

Depreciation = $16,000 for first year

$9,600 for second year

$5,760 for the third year

$3,456 for fourth year

$184 for fifth year

c. Assume that Becker Office Service sold the computer system at the end of the fourth year for $15,000. Compute the amount of gain or loss using each depreciation method.

Under the straight line depreciation method, by the four year, we have an accumulated depreciation of $7,000 x 4 = $28,000, so the net book value of the asset is $40,000 - $28,000 = $12,000.

If the computer system is sold for $15,000, the capital gain is of $12,000.

Under the double declining method, accumulated depreciation by the four year is $34,816, so the book value of the asset is only $5,184, and the sale of $15,000 would net a capital gain of $9,816.