Question

P company bought a machine for $65,000. The estimated useful life of the machine was five years, and the estimated residual value was $5,000. Determine book value at the end of year 2, assuming it uses double-declining method of depreciation. a. $41,000 b. $53,000 c. $39.000 d. $23.400​

Answer 1

ANSWER :

• ✎ If P company bought a machine for $65,000, which estimated useful life was five years, and the estimated residual value was $5,000; then the book value of the machine at the end of 2nd year assuming it uses double-declining method of depreciation will be $23,400.

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SOLUTION :

❑ Given :-

• Purchase value of the machine = $65,000

• Estimated useful life of the machine = 5 years

• Estimated residual value of the machine = $5,000

❑ To determine :-

• Book value at the end of second year assuming it uses double-declining method of depreciation = ?

❑ Calculation :-

• Step 1 : Calculate the depreciation Rate —

Here,

• Estimated useful life of the machine = 5 years

Since the double declining method of depreciation is to be used, thus,

• Depreciation Rate = 2 × 1/Estimated Useful life

⟶ Depreciation Rate = 2 × 1/5

⟶ Depreciation Rate = 0.4%

• Step 2 : Calculate the depreciation charged in the 1st year —

Here,

• Cost of the machine = $65,000

• Depreciation Rate = 0.4%

So,

• Depreciation charged on 1st year = $65,000 × 0.4%

⟶ Depreciation charged on 1st year = $26,000

• Step 3 : Calculate the book value of the machine at the end of 1st year —

Here,

• Cost of the machine = $65,000

• Depreciation charged = $26,000

So,

• Book value at the end of 1st year = $ 65,000 - $26,000

⟶ Book value at the end of 1st year = $39,000

• Step 4 : Calculate the depreciation charged in 2nd year —

Here,

• Value of the machine = $39,000

• Depreciation Rate = 0.4%

So,

• Depreciation charged on 2nd year = $39,000 × 0.4%

⟶ Depreciation charged on 2nd year = $15,600

• Step 5 : Calculate the book value at the end of 2nd year —

Here,

• Purchase cost of the machine = $65,000

• Depreciation charged in 1st year = $26,000

• Depreciation charged in 2nd year = $15,600

Hence,

• Book value at the end of 2nd year = $ 65,000 - $26,000 - $15,600

∴ Book value at the end of 2nd year = $23,400