Calculating Depreciation for Sandblasting Equipment

Depreciation Calculation for Sandblasting Equipment

Sandblasting equipment acquired at a cost of $40,000 has an estimated residual value of $8,000 and an estimated useful life of eight years. It was placed into service on April 1 of the current fiscal year, which ends on December 31. Let's determine the depreciation for the current fiscal year and for the following fiscal year using different methods.

(a) Depreciation for the Current Fiscal Year - Straight-Line Method

The straight-line depreciation for the current fiscal year is calculated as follows:

Depreciable Base: $40,000 - $8,000 = $32,000

Annual Depreciation: $32,000 / 8 = $4,000

Since the equipment was used for only 9 months in the first fiscal year, the depreciation for the current fiscal year by the straight-line method would be:

$4,000 * 9 / 12 = $3,000

(b) Depreciation for the Following Fiscal Year - Double-Declining-Balance Method

The double-declining-balance method for depreciation is calculated as follows:

Straight-Line Rate: 1 / 8 = 12.5%

Double-Declining-Balance Rate: 2 * 12.5% = 25%

At the beginning of the following fiscal year, the book value of the equipment would be $40,000 - $3,000 = $37,000

The depreciation for the following fiscal year using the double-declining-balance method would be:

$37,000 * 25% = $9,250

Final Answer

The straight-line depreciation for the current fiscal year is $3,000, and the double-declining-balance depreciation for the following fiscal year would be $9,250 based on the calculations from the costs and estimated values given.

Explanation

For straight-line depreciation, the depreciable base is determined by subtracting the residual value from the initial cost. The equipment's annual depreciation is calculated based on its useful life. Since the equipment was put into service in the middle of the fiscal year, the depreciation amount is adjusted accordingly.

On the other hand, the double-declining-balance method involves a higher depreciation rate initially, which decreases over time. The book value of the equipment is used to calculate depreciation, considering the residual value limit.

It's essential to remember that accumulated depreciation cannot reduce the asset's book value below its residual value. If this happens, the last depreciation expense should be limited.

Questions:

(a) What is the depreciation for the current fiscal year by the straight-line method?

  1. $3,000
  2. $4,000
  3. $5,000
  4. $6,000

(b) What is the depreciation for the following fiscal year by the double-declining-balance method?

  1. $7,000
  2. $4,000
  3. $3,000
  4. $2,000
Answers:

(a) The depreciation for the current fiscal year by the straight-line method is $3,000.

(b) The depreciation for the following fiscal year by the double-declining-balance method would be $9,250.

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