11170-11-1P AID: 8739 | 26/11/2020

Depreciation:

It is the amount of reduction in the value of a tangible fixed asset due to tear and wear,
maintenance and passage of time. This expense reduces the carrying value of asset on the
financial statements and provides the true value of asset. It is charged as an expense on
the income statement. Different methods of calculating depreciation expense include
straight-line method, double declining method, sum of year’s digits method etc.

Straight-Line Method:

Under the straight-line method, the asset is recognized as an expense as a yearly fixed
amount based on useful life and acquisition cost of the asset. This method uses
depreciable value or base value of the asset to calculate depreciation expense. The
following is the formula to calculate the yearly depreciation:

Double-declining method:

The method assumes that the asset would decrease its value more in the early years and
less in the later years and hence the cost of the asset is divided based on the straight-line
rate and declining amount method.

(1)

Calculate the depreciation for each year of the asset’s eight-year life.

Company uses double declining balance method for first four years. Then, the company
uses straight-line method to determine the depreciation.

Step 1: Determine the useful life.

The useful life in years is calculated by dividing the depreciable cost with the annual
depreciation as shown below:

Step 2: Determine the age of assets.

The age of assets is calculated by dividing the accumulated depreciation with the annual
depreciation as shown below:

Step 3: Calculate the depreciation rate applied using double declining balance
method.

The depreciation rate applied using double declining balance method is calculated by
dividing 100% with useful life in years and multiplied with 2 as shown below:

Note: Use 100% to represent depreciation in percentage. Multiply the depreciation rate
by 2 as it is a double-declining method.

Step 4: Calculate the depreciation expense.

The depreciation expense is calculated by multiplying the book value at the end of the
year with depreciation rate per year as shown below:

Book value end of Depreciation Depreciation Book value end of

Year
the year ($) rate per year ($) the year ($)
2010 200,000 × 10% = 20,000 180,000
2011 180,000 × 10% = 18,000 162,000
2012 162,000 × 10% = 16,200 145,800
2013 145,800 × 10% = 14,580 131,220

At the fourth year, the depreciation expense as per double-declining balance method is
$14,580.
(2)

Prepare adjusting entry for the year 2013 tor record depreciation for the year.

Step 1: Determine the un-depreciated cost.

The un-depreciated cost is calculated by deducting the depreciation to date as per

straight-line method for three years from the cost of the asset as shown below:

Hence, the un-depreciated cost is $170,000.

Working note:

Step 1: Determine the depreciation as per straight line method for three years.

Step 2: Determine the depreciation expense as per double-declining balance method

for seventeen years of remaining life.

Step 3: Prepare journal entry for depreciation expense.

A change made in the depreciation method should be provided in the disclosure note. It
must also provide effect of the change on net income and earnings per share.

Journal entry

Explanation:

 Depreciation expense is an expense account and carries debit balance. It is

increased on charging the depreciation to income statement. Hence, it is debited.

 Accumulated depreciation is a contra asset account and carries credit balance. It is

increased on providing depreciation. Hence, it is credited.