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Depreciation -straight-line versus double declining-balance

Same Day Laundry Services purchased a new steam press January 1, for $35,000. It is expected to have a five-year useful life and a $3,000 salvage value. Same Day expects to use the steam more extensively in the early years of its life.

Required

a. Calculate the depreciation expense for each of the five years, assuming the use of straight-line depreciation.

b. Calculate the depreciation expense for each of the five years, assuming the use of double-declining-balance depreciation.

c. Would the choice of one depreciation method over another produce a different amount of cash flow for any year? Why or why not?

d. Assume that Same Day Laundry Services sold the steam press at the end of the third year for $20,000. Compute the amount of gain or loss using each depreciation method.

Solution Preview

Please see attached file
Effects of straight-line versus double declining-balance depreciation
Same Day Laundry Services purchased a new steam press January 1, for $35,000.  It is expected to have a five-year useful life and a $3,000 salvage value.  Same Day expects to use the steam more extensively in the early years of its life.

Required

a. Calculate the depreciation expense for each of the five years, assuming the use of straight-line depreciation.

Cost= $35,000
Salvage Value= $3,000
Life= 5 years
Annual depreciation= (Cost - Salvage Value) / Life= $6,400 =($35,000 - $3,000) / 5

Year Depreciation expense using Straight Line depreciation Book Value at the end of the year
1 $6,400 ...

Solution Summary

Calculates depreciation expenses using straight-line and double declining-balance depreciation methods.

$2.19