Gerald Engle hart Industries changed room the double-declining balance to the straight-line method in 2008 on all its plant assets. There was no change in the assets' salvage values or useful lives. Plant assets, acquired on January 2, 2005, had an original cost of $1,600,000, with a $100,000 salvage value and an 8-year estimated useful life. Income before depreciation expense was $270,000 in 2007 and $300,000 in 2008. What is the book value of January 1,2008?
To determine the book value of the plant assets on January 1, 2008, you need to calculate the accumulated depreciation using the double-declining balance method until the end of 2007. Then, subtract the accumulated depreciation from the original cost of the assets.
1. Calculate the annual depreciation expense using the double-declining balance method:
Annual Depreciation Expense = (2 / Useful Life) * Book Value at Beginning of Year
Given:
Useful Life = 8 years
Original Cost = $1,600,000
Book Value at Beginning of 2007 = Original Cost - Accumulated Depreciation in 2006
Accumulated Depreciation in 2006 = (2 / 8) * $1,600,000 = $400,000
Book Value at Beginning of 2007 = $1,600,000 - $400,000 = $1,200,000
Annual Depreciation Expense = (2 / 8) * $1,200,000 = $300,000
2. Calculate the accumulated depreciation at the end of 2007:
Accumulated Depreciation at the end of 2007 = Annual Depreciation Expense * Number of Years = $300,000 * 3 = $900,000
3. Calculate the book value on January 1, 2008:
Book Value on January 1, 2008 = Original Cost - Accumulated Depreciation at the end of 2007
= $1,600,000 - $900,000
= $700,000
Therefore, the book value of the plant assets on January 1, 2008, is $700,000.