A firm has purchased a building with a useful life of 7 years. It cost $35,000 and its salvage value is estimated at $5,000. If the firm uses double declining method, what's the depreciation expense recognized in Year 2?
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A. B. C. D.B
In Double Declining method, depreciation = (2/n)*book value. In Year 1, depreciation = (2/7)*35,000 = 10,000. Hence, in Year 2, depreciation = (2/7)*(35,000-
10,000) = $7,143.
To calculate the depreciation expense using the double declining balance method, you need to follow these steps:
Step 1: Determine the straight-line depreciation rate. The straight-line depreciation rate is calculated by dividing 1 by the useful life of the asset. In this case, the useful life of the building is 7 years, so the straight-line depreciation rate is 1/7 = 0.142857.
Step 2: Determine the double declining balance rate. The double declining balance rate is twice the straight-line depreciation rate. Therefore, the double declining balance rate is 2 * 0.142857 = 0.285714.
Step 3: Calculate the depreciation expense for Year 1. In the first year, the depreciation expense is calculated by multiplying the initial cost of the asset by the double declining balance rate. So, the depreciation expense in Year 1 is $35,000 * 0.285714 = $10,000.
Step 4: Calculate the book value at the beginning of Year 2. The book value is the cost of the asset minus the accumulated depreciation. In Year 1, the accumulated depreciation is $10,000. Therefore, the book value at the beginning of Year 2 is $35,000 - $10,000 = $25,000.
Step 5: Calculate the depreciation expense for Year 2. To calculate the depreciation expense for Year 2, you need to multiply the book value at the beginning of Year 2 by the double declining balance rate. So, the depreciation expense in Year 2 is $25,000 * 0.285714 = $7,142.85.
Given that the question asks for the depreciation expense in Year 2, the closest answer is B. $7,143.