Question

Sheffield Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods. You are to assume that the following schedules have been correctly prepared for this asset using (1) the straight-line method, (2) the sum-of-the-years'-digits method, and (3) the double-declining-balance method. Year Straight-Line Sum-of-the- Years'-Digits Double-Declining- Balance 1 $12,060 $20,100 $26,800 2 12,060 16,080 16,080 3 12,060 12,060 9,648 4 12,060 8,040 5,789 5 12,060 4,020 1,983 Total $60,300 $60,300 $60,300 What is the cost of the asset being depreciated? Cost of asset $ What amount, if any, was used in the depreciation calculations for the salvage value for this asset? Salvage value $ Which method will produce the highest charge to income in Year 1? The method that produces the highest charge to income in Year 1 is select a method Which method will produce the highest charge to income in Year 4? The method that produces the highest charge to income in Year 4 is select a method Which method will produce the highest book value for the asset at the end of Year 3? The method that produces the highest book value for the asset at the end of Year 3 is select a method If the asset is sold at the end of Year 3, which method would yield the highest gain (or lowest loss) on disposal of the asset? The method that will yield the highest gain (or lowest loss) on disposal of the asset if the asset is sold at the end of Year 3 is

Answer 1

	straight-line method	sum-of-the-years'-digits method	double-declining-balance method
Year 1	$        12,060	$        20,100	$        26,800
Year 2	$        12,060	$        16,080	$        16,080
Year 3	$        12,060	$        12,060	$          9,648
Year 4	$        12,060	$          8,040	$          5,789
Year 5	$        12,060	$          4,020	$          1,983
Total	$        60,300	$        60,300	$        60,300

What is the cost of the asset being depreciated?
The cost of an asset is calculated using the data provided in the double-declining-balance method.
Depreciation rate as per the straight-line method (1/5 years)			20%
Depreciation rate as per the double-declining-balance method (2*20%)			40%
Cost of asset x 40% = Depreciation expense
Cost of asset x 40% = 26800
Cost of asset = 26800 / 40%			$        67,000
What amount, if any, was used in the depreciation calculations for the salvage value for this asset?
Cost of asset			$        67,000
Less: Depreciable costs (Total of depreciation for all five years)			$        60,300
Salvage value			$          6,700
Which method will produce the highest charge to income in Year 1?
Depreciation expense for Year 1 under the straight-line method			$        12,060
Depreciation expense for Year 1 under sum-of-the-years'-digits method			$        20,100
Depreciation expense for Year 1 under double-declining-balance method			$        26,800
The double-declining-balance method provides the highest depreciation expense for Year 1.
The method that produces the highest charge to income in Year 1 is the double-declining-balance method.
Which method will produce the highest charge to income in Year 4?
Depreciation expense for Year 4 under the straight-line method			$        12,060
Depreciation expense for Year 4 under sum-of-the-years'-digits method			$          8,040
Depreciation expense for Year 4 under double-declining-balance method			$          5,789
The straight-line method provides the highest depreciation expense for Year 4.
The method that produces the highest charge to income in Year 4 is a straight-line method.
Which method will produce the highest book value for the asset at the end of Year 3?
Year	straight-line method	sum-of-the-years'-digits method	double-declining-balance method
Year 1	$             12,060	$ 20,100	$        26,800
Year 2	$             12,060	$ 16,080	$        16,080
Year 3	$             12,060	$ 12,060	$          9,648
Total Accumulated Depreciation for 3 years	$             36,180	$ 48,240	$        52,528
Cost of asset	$             67,000	$ 67,000	$        67,000
Less: Total Accumulated Depreciation for 3 years	$             36,180	$ 48,240	$        52,528
Book value at the end of the Year 3	$             30,820	$ 18,760	$        14,472
The method that produces the highest book value for the asset at the end of Year 3 is straight-line method
which method would yield the highest gain (or lowest loss) on disposal of the asset?
The double-declining-balance method provides the lowest book value at the end of Year 3.
The lowest book value provides the highest gain on the disposal of assets. Thus, the double-declining-balance method would yield the highest gain (or lowest loss) on disposal of the asset.
The method that will yield the highest gain (or lowest loss) on disposal of the asset if the asset is sold at the end of Year 3 is the double-declining-balance method