Session 9: Financial Reporting and Analysis: Inventories, Long-lived Assets, Income Taxes, and Non-current Liabilities Reading 37: Long-lived Assets
LOS d: Calculate depreciation expense given the necessary information.
Novak, Inc. owns equipment with a historical cost of $20,000, a useful life of 5 years, and an estimated salvage value of $5,000. Using the double declining balance method, depreciation expense in Year 3 for this equipment is:
DDB depreciation in each year is 2/5 of the carrying value at the beginning of the year, until the carrying value reaches the estimated salvage value.
Year 1 DDB depreciation = $20,000 × 2/5 = $8,000 Carrying value = $20,000 – $8,000 = $12,000
Year 2 DDB depreciation = $12,000 × 2/5 = $4,800 Carrying value = $12,000 – $4,800 = $7,200
Year 3 DDB depreciation = $7,200 × 2/5 = $2,880 Because $7,200 – $2,880 = $4,320 would depreciate the equipment below its salvage value, depreciation in Year 3 is limited to $7,200 – $5,000 = $2,200.
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