Purpose: This exercise is designed to test your ability to solve for missing data by applying your knowledge regarding depreciation computations.
Dunlap 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 (SL) method, (2) the sum-of-the-years'-digits (SYD) method, and (3) the double-declining balance (DDB) method (switching to the straight-line method after the mid-life of the asset).
|
Year
|
Straight-line
|
Sum-of-the- Years'-Digits
|
Double-declining Balance
|
|
1
|
$ 6,000
|
$ 10,000
|
$ 14,400
|
|
2
|
6,000
|
8,000
|
8,640
|
|
3
|
6,000
|
6,000
|
5,184
|
|
4
|
6,000
|
4,000
|
888
|
|
5
|
6,000
|
2,000
|
888
|
|
Total
|
$ 30,000
|
$ 30,000
|
$ 30,000
|
Instructions
Answer the following questions:
(a) What is the cost of the asset being depreciated?
(b) What amount, if any, was used in the depreciation calculations for the salvage value of this asset?
(c) Which method will produce the highest charge to income in Year 1?
(d) Which method will produce the highest charge to income in Year 4?
(e) Which method will produce the highest book value for the asset at the end of Year 3?
(f) 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?