Question

Kent has $500,000 in equipment and machinery that was acquired on January 2, 2009. Kent has been using the double-declining balance method to depreciate the equipment over an estimated 10 year economic life with no salvage value. On January 1, 2011, Kent decides to change to the straight line method with no salvage value. Kent has a 40% tax rate. Calculate the following:

1. Accumulated depreciation at 12/31/10
2. Depreciation expense for 2011
3. Accumulated depreciation at 12/31/11

Indicate the amount of the accounting change shown net of tax if appropriate.

I have the answers, can you work them out so I know how to find them please

Answer 1

Answer

• All working forms part of the answer
• TO FIND OUT Requirement ‘a’, ‘b’ and ‘c’, we have to follow following steps:
  Step 1: Find the double declining rate applicable.
  Step 2: Calculate depreciation expense for 2009 and 2010 on the basis of rate determined in Step 1.
  Step 3: Sum of depreciation expense (calculated in Step 2) would give Requirement ‘a’ answer
  Step 4: Find new book value, remaining life, and calculate Straight Line Depreciation for 2011 = Answer for requirement ‘b’
  Step 5: Requirement ‘a’ answer + Requirement ‘b’ answer
• Step 1

A	Cost	$          500,000.00
B	Residual Value	$                           -
C=A - B	Depreciable base	$          500,000.00
D	Life [in years]	10
E=C/D	Annual SLM depreciation	$            50,000.00
F=E/C	SLM Rate	10.00%
G=F x 2	DDB Rate	20.00% = Step 1 complete

• Step 2

Year	Beginning Book Value	Depreciation rate	Depreciation expense	Ending Book Value	Accumulated Depreciation
2009	$           500,000.00	20.00%	$       100,000.00	$           400,000.00	$      100,000.00
2010	$           400,000.00	20.00%	$         80,000.00	$           320,000.00	$      180,000.00 = Requirement ‘a’ Answer

• Step 3 = Requirement ‘a
  Accumulated Depreciation at 12/31/10 = $ 100000 + $ 80000 = $ 180,000
• Step 4

A	Cost	$500,000
B [calculated in Requirement 'a']	Accumulated depreciation till 12/31/10	$180,000
C = A - B	Book Value	$320,000
D = 10 years - 2 years already passed	Remaining life [years]	8
E = C/D	New Straight Line depreciation from 2011	$40,000 = Answer for Requirement ‘b’

• Requirement ‘b’
  Depreciation expense for 2011 = $ 40,000
• Step 5 = Requirement ‘c’

Accumulated Depreciation at 12/31/2011 = $ 180000 (Requirement ‘a’) + $40000 (Requirement ‘b’)
= $ 220,000 = Answer