Question

On January 1, Year 1, Phillips Company made a basket purchase including land, a building and equipment for $895,000. The appraised values of the assets are $64,000 for the land, $920,000 for the building and $176,000 for equipment. Phillips uses the double-declining-balance method for the equipment which is estimated to have a useful life of four years and a salvage value of $10,000. What is the depreciation expense for the equipment for Year 1

Answer 1

Answer: Depreciation expense for equipment for Year 1=$67,896

Explanation:

We will first find the value of the Equipment

Equipment value = appraised value of Equipment asset/Total appraised values of assets X Cost of the basket purchase.

176,000/(64,000 +920,000 +176,000) X 895,000 =176000/1,160,000 X 895,000=0.151724 X 895,000

=$135,793

We will then calculate the Depreciation using Declining balance depreciation formulae

Declining balance depreciation = 2 X straight line rate X Book value of asset

But

Straight line rate = 1/ useful life of asset in years, years =4yrs

=1/4=0.25

Depreciation = 2 X straight line rate X Book value of asset

=2x0.25 x$135,793 =$67,896

Depreciation expense for equipment in year 1=$67,896