A firm has purchased heavy machinery with a useful life of 7 years. It cost $28,000 and its salvage value is estimated at $4,000. If the firm uses double declining method, what's the depreciation expense recognized in Year 1?
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A. B. C. D.B
In Double Declining method, depreciation = (2/n)*book value = (2/7)*28,000.
To calculate the depreciation expense using the double declining balance method, we need to follow these steps:
Step 1: Determine the depreciation rate. The depreciation rate for the double declining balance method is twice the straight-line depreciation rate. The straight-line depreciation rate is calculated by dividing the difference between the initial cost and the salvage value by the useful life.
Depreciation rate = (1 / Useful life) * 2
In this case, the useful life is 7 years, so the depreciation rate would be:
Depreciation rate = (1 / 7) * 2 = 2/7
Step 2: Calculate the depreciation expense for Year 1. To calculate the depreciation expense for Year 1, we multiply the depreciation rate by the initial cost of the asset.
Depreciation expense = Depreciation rate * Initial cost
Given that the initial cost of the machinery is $28,000, and the depreciation rate is 2/7, we can calculate the depreciation expense for Year 1:
Depreciation expense = (2/7) * $28,000
Depreciation expense = $8,000
Therefore, the correct answer is B. $8,000.
Please note that while the calculation is straightforward, it's important to understand the concepts and formulas behind it to apply them correctly.