Question

Suppose FastShip purchased equipment on January 1, 2018, for $48,000. The expected useful life of the equipment is 10 years or 400,000 units of protection, and its residual value is $8,000. FastShip prepared the following analysis of two depreciation methods:

Data Table Method B: Double-Declining-Balance Annual Depreciation Accumulated Year Expense Depreciation Method A: Straight-Line Annual Depreciation Accumulated Expense Depreciation Book Value $ 48,000 4,000 $ 4,000 44,000 4,000 8,000 40,000 4,000 12,000 36,000 Start Book Value $ 48,000 38,400 30,720 $ $ 2018 2019 9,600 7,680 6,144 9,600 17,280 23,424 2020 24,576

Answer 1

1. If the Fastship has the choice to select between the straight line method and double declining balance method then it would be beneficial for Fastship if it selects double declining balance method.

Because, double declining balance method results in more amount of depreciation expense during initial years and less expense during last years. When the entity can show more depreciation expense then it results in less profits. If the profits are less then the income tax burden is also less. As a result, Fastship can take the advantage of paying less taxes during initial years by showing more depreciation expense.

Even though the Fastship pays the more taxes during last years, by considering the time factor of money overall result would be more beneficial compared to straight line method.

2..

Date	Accounts title and explanation	Debit	Credit
1 July, 2020	Depreciation	$3072
	Accumulated depreciation		$3072
	(To record depreciation expense for 2020)
1 July, 2020	Cash	$42000
	Accumulated depreciation	$10752
	Equipment		$48000
	Profit on sale		$4752
	(To record sale of equipment)

Note 1: calculations of depreciation amount for 2020:

Depreciation expense per year under double declining balance method = (cost - accumulated depreciation) × depreciation rate depreciation rate = depreciation rate under straight line method × 2.

= [($4000/{$48000-$8000})×100]×2

=[($4000/$40000)×100]×2

= [0.1×100]×2

= 10×2

= 20%

Depreciation expense per year under double declining balance method = ($48000 - $17280)×20%

= $30720×20%

= $6144

But in the year the equipment was not used for full year, it was used only for half of the year (from 1 Jan to 1 July),

So depreciation expense for 2020 = $6144×1/2

= $3072.

Accumulated depreciation at on 1 July 2020 = $7680 + $3072 = $10752

Note 2: calculations of profit/(loss) on of assets :

Profit/(loss) = Sale price - book value of asset on date of sale.

= $42000 - (cost - accumulated depreciation )

= $42000 - ($48000 - $10752)

= $42000 - $37248

= $4752

This is profit.