Question

On October 1, 2014, Hess Company places a new asset into service. The cost of the asset is $80,000 with an estimated 5-year life and $20,000 salvage value at the end of its useful life. What is the book value of the plant asset on the December 31, 2015, balance sheet assuming that Hess Company uses the double-declining-balance method of depreciation?

Answer 1

$43,200

Explanation:

Data provided in the question:

Cost of the asset = $80,000

Useful life of the machine = 5 years

Salvage value at the end of useful life = $20,000

Now,

Using the double declining method of depreciation

Annual depreciation rate = 2 × [1 ÷ useful life ]

= 2 × [ 1 ÷ 5 ]

= 2 × 0.2

= 0.4 or 40%

thus,

The depreciation from October 1, 2014 to December 31, 2014

= Annual Depreciation rate × duration × Book value for 2014

= 0.4 × 3 months × $80,000

= 0.4 × 0.25 year × $80,000

= $8,000

Book value for 2015

= Cost - depreciation till December 31, 2014

= $80,000 - $8,000

= $72,000

Therefore,

Depreciation for the year 2015

= Annual Depreciation rate × Book value for 2015

= 0.4 × $72,000

= $28,800

Therefore,

the book value of the plant asset on the December 31, 2015

= Book value for 2015 - Depreciation for the year 2015

= $72,000 - $28,800

= $43,200