Inventory and Depreciation Concepts
Assume that an organization purchased two pieces of equipment on April 1st (the first day of its fiscal year), as follows:
(1) One laboratory equipment that cost $530,000 and has an expected life of 8 years. The salvage value is 10 percent of the cost. No equipment was traded in on this purchase.
(2) One radiology equipment that cost $675,000 and has an expected life of 6 years. The salvage value is 15 percent of the cost. No equipment was traded in on this purchase.
Your Tasks
For each piece of equipment:
1. Compute the straight-line depreciation for:
a) The lab equipment
b) The radiology equipment
2. Compute the double declining balance depreciation for:
a) The lab equipment
b) The radiology equipment
Does anyone know the steps, into solution?
i tried this method
Laboratory Equipment Straight Line Method Depreciation = (530000 - 8% of 530000) / 8 = 60950?
To calculate the straight-line depreciation for each piece of equipment, you need to follow these steps:
1. Calculate the depreciable cost: Depreciable cost is the original cost minus the salvage value.
a) For the laboratory equipment:
Depreciable cost = $530,000 - (10% of $530,000) = $530,000 - $53,000 = $477,000
b) For the radiology equipment:
Depreciable cost = $675,000 - (15% of $675,000) = $675,000 - $101,250 = $573,750
2. Determine the useful life: The useful life is the number of years over which the equipment is expected to be used.
a) For the laboratory equipment: 8 years
b) For the radiology equipment: 6 years
3. Calculate the annual depreciation expense: Divide the depreciable cost by the useful life.
a) For the laboratory equipment: $477,000 / 8 years = $59,625 per year
b) For the radiology equipment: $573,750 / 6 years = $95,625 per year
To calculate the double declining balance depreciation, you need to follow these steps:
1. Determine the depreciation rate: The depreciation rate is twice the straight-line depreciation rate (100% divided by the useful life).
a) For the laboratory equipment: 100% / 8 years = 12.5%
Depreciation rate = 2 * 12.5% = 25%
b) For the radiology equipment: 100% / 6 years = 16.67%
Depreciation rate = 2 * 16.67% = 33.33%
2. Calculate the annual depreciation expense: Multiply the book value (original cost minus accumulated depreciation) by the depreciation rate.
a) For the laboratory equipment:
Year 1:
Depreciation expense = $530,000 * 25% = $132,500
Year 2:
Depreciation expense = ($530,000 - $132,500) * 25% = $99,375
Year 3:
Depreciation expense = ($530,000 - $132,500 - $99,375) * 25% = $74,531.25
Continue this calculation for each year until the end of the useful life.
b) For the radiology equipment:
Follow the same steps as above but using the radiology equipment's cost, depreciation rate, and book value.
Note: The double declining balance method can result in higher depreciation expenses in early years and lower expenses in later years compared to the straight-line method. The salvage value is not considered in the double declining balance method.