Parker Inc. purchased a $30,000 asset with a salvage value of $1,200 and an estimated useful life of three years. What is the book value at the end of years one and two using the 150% declining balance method?
To determine the book value at the end of each year using the 150% declining balance method, you need to follow these steps:
1. Calculate the straight-line depreciation rate: Divide 100% by the useful life of the asset. In this case, it will be 100% divided by 3 years, which equals 33.33% (rounded to 2 decimal places).
2. Determine the depreciation factor: Multiply the straight-line depreciation rate by the 150% declining balance factor. In this case, it will be 33.33% multiplied by 1.50, which equals 49.99% (rounded to 2 decimal places).
3. Calculate the annual depreciation expense: Multiply the depreciation factor by the beginning book value of the asset for each year.
- For year one: Multiply $30,000 (the initial cost) by 49.99%, which equals $14,997 (rounded to the nearest dollar).
- For year two: Multiply the book value at the end of year one by 49.99%. The book value at the end of year one is $30,000 - $14,997 = $15,003. Multiply $15,003 by 49.99%, which equals $7,500 (rounded to the nearest dollar).
4. Calculate the book value: Subtract the annual depreciation expense from the beginning book value for each year.
- For year one: The beginning book value is $30,000, and the depreciation expense is $14,997. Subtracting, $30,000 - $14,997 = $15,003.
- For year two: The beginning book value is $15,003, and the depreciation expense is $7,500. Subtracting, $15,003 - $7,500 = $7,503.
Therefore, the book value at the end of year one is $15,003, and the book value at the end of year two is $7,503 when using the 150% declining balance method.