66 On January 2013 Grande Communications purchased a new pie

66. On January 2013, Grande Communications purchased a new piece of equipment that cost $25,000. The estimated useful life is 5 years and estimated residual value is $2,500. If Grande uses the double-declining balance method, what is depreciation for 2014? a. 5,400 *b. 6,000 c. 8,333 d. 15,000

Solution

Solution:- b. 6,000

Explanation:-

Under the straight line method, the 5 year life means the asset\'s annual depreciation will be 20% (5,000 / 25,000 *100) of the asset\'s cost. Under the double declining balance method the 20% straight line rate is doubled to be 40%. However, the 40% is multiplied times the asset\'s beginning of the year book value instead of the asset\'s original cost. At the beginning of the first year, the asset\'s book value is $25,000 since there has not yet been any depreciation recorded. Therefore, under the double declining balance method the $25,000 of book value will be multiplied by 40% for depreciation in Year 1 of $10,000. The journal entry will be a debit of $10,000 to Depreciation Expense and a credit to Accumulated Depreciation of $10,000.

At the beginning of the second year, the asset\'s book value will be $15,000. This is the asset\'s cost of $25,000 minus its accumulated depreciation of $10,000. The $15,000 of beginning book value multiplied by 40% results in $6,000. The depreciation entry for Year 2 will be a debit to Depreciation Expense for $6,000 and a credit to Accumulated Depreciation for $6,000.

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