An asset with a 10-year life has an acquisition cost of 5,000. The firm, using double declining method of depreciation has an accumulated depreciation of 2,440 at the end of year 3 (verify this!). The depreciation expense in year 4 is equal to ________.
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A. B. C. D.C
The book value at the beginning of year 4 = 5,000-2,440 = 2,560. Then, depreciation expense in year 4 = 2/10*book value = 512.
To calculate the depreciation expense for year 4 using the double declining balance method, we need to determine the depreciation rate and apply it to the remaining book value of the asset.
The double declining balance method depreciates an asset at a faster rate in the early years and gradually decreases the depreciation expense over time. The formula to calculate the depreciation expense using this method is:
Depreciation Expense = Book Value at the Beginning of the Year × Depreciation Rate
First, let's calculate the depreciation rate:
Depreciation Rate = 2 / Useful Life
In this case, the useful life of the asset is 10 years, so the depreciation rate is:
Depreciation Rate = 2 / 10 = 0.2
Now, let's determine the book value at the beginning of year 4. We know that the accumulated depreciation at the end of year 3 is $2,440. To find the book value at the end of year 3, we subtract the accumulated depreciation from the acquisition cost:
Book Value at the End of Year 3 = Acquisition Cost - Accumulated Depreciation at the End of Year 3
Book Value at the End of Year 3 = $5,000 - $2,440 = $2,560
To find the book value at the beginning of year 4, we need to subtract the depreciation expense for year 3 from the book value at the end of year 3:
Book Value at the Beginning of Year 4 = Book Value at the End of Year 3 - Depreciation Expense for Year 3
Since the accumulated depreciation at the end of year 3 represents the depreciation expense for years 1, 2, and 3, we can subtract it directly:
Book Value at the Beginning of Year 4 = $2,560 - $2,440 = $120
Now, we can calculate the depreciation expense for year 4:
Depreciation Expense for Year 4 = Book Value at the Beginning of Year 4 × Depreciation Rate
Depreciation Expense for Year 4 = $120 × 0.2 = $24
So, the correct answer is not provided in the options. The depreciation expense for year 4 should be $24, which is not listed among the answer choices.