1. A pressurized spray painter was purchased on April 1 of the fiscal year for $4,800. It has a useful life of 4 years and a residual value of $300. Determine depreciation expense for the first two years, assuming a fiscal year end of December 31 and using (a) the straight-line method and (b) the double-declining-balance method.
To determine the depreciation expense for the first two years using the straight-line method, we need to consider the initial cost, useful life, and residual value.
(a) Straight-Line Method:
Depreciation expense under the straight-line method is calculated by subtracting the residual value from the initial cost and dividing the result by the useful life.
1. Find the depreciable cost: Initial cost – Residual value
Depreciable cost = $4,800 - $300 = $4,500
2. Determine the annual depreciation expense: Depreciable cost / Useful life
Annual depreciation expense = $4,500 / 4 years = $1,125
For the first year, the depreciation expense will be $1,125, and for the second year, it will also be $1,125.
(b) Double-Declining-Balance Method:
Depreciation expense under the double-declining-balance method is determined using a fixed rate multiplied by the book value of the asset at the beginning of the period.
1. Find the depreciation rate: 100% divided by the useful life, multiplied by 2
Depreciation rate = (100% / 4 years) * 2 = 50%
2. Determine the annual depreciation expense:
Year 1: Book value at the beginning of the year * Depreciation rate
Book value at the beginning of year 1 = Initial cost = $4,800
Year 1 depreciation expense = $4,800 * 50% = $2,400
Year 2: (Book value at the beginning of the year - Year 1 depreciation) * Depreciation rate
Book value at the beginning of year 2 = Initial cost - Year 1 depreciation
Book value at the beginning of year 2 = $4,800 - $2,400 = $2,400
Year 2 depreciation expense = $2,400 * 50% = $1,200
For the first year, the depreciation expense will be $2,400, and for the second year, it will be $1,200.
Using these methods, the depreciation expense for the first two years is as follows:
(a) Straight-Line Method: $1,125 for both years.
(b) Double-Declining-Balance Method: $2,400 for the first year and $1,200 for the second year.