Question

Computing Depreciation and Accounting for a Change of Estimate Lambert Company acquired machinery costing $110,000 on January 2, 2019. At that time, Lambert estimated that the useful life of the equipment was 6 years and that the residual value would be $15,000 at the end of its useful life. Compute depreciation expense for this asset for 2019, 2020, and 2021 using the: a. straight-line method. Round to the nearest dollar. 2019 Answer 2020 Answer 2021 Answer b. double-declining-balance method. Round to the nearest dollar. 2019 Answer 2020 Answer 2021 Answer c. Assume that on January 2, 2021, Lambert revised its estimate of the useful life to 7 years and changed its estimate of the residual value to $10,000. What would be the new depreciation expense in 2021 for each of the above depreciation methods

Answer 1

Answer: please see answers in explanation column

Explanation:

a) Under straight-line method,

 Depreciation expense =(Cost - residual value) ÷ No of years =

= ($110,000 - $15,000) ÷ 6 years = $15,833  which refers to the yearly depreciation expense.

Therefore,  the yearly depreciation expense of $15,833 will be applied to the Years 2019, 2020 and 2021.

Total depreciation for all the three years equals  

 $15,833 x  3 years = $47,499.

(b) The double-declining method

which is  2 x  Straight - Line Depreciation Percentage x Book value

 Straight - Line Depreciation Percentage

100% ÷ 6 years = 16.67%,

 Therefore, Year 2019= 2 x  16.67% x  $110,000 = $36,663

Year 2020=2 x  16.67% x  $73,337 ($110,000 - $36,663) = $24,443

Year 2021=2 x  16.67% x $48,894 ($73,337 - $24,443) = $16,296

The total of the three years ie 2019 to 2021  =$77,402

(c) Given that in 2021 which is  after 2 years, the revised estimated useful life becomes 7 years and the residual value is $10,000

Depreciation Using  the straight-line method becomes  

Depreciation expense =(Cost - residual value) ÷ No of years

But Net Book Value, which is the cost  at the end of 2019  

$110,000 - $15,833  x  2 years = $78,334

Therefore, Depreciation expense= ($78,334 - $10,000) ÷ 7 years = $9,762  

Also,

Using double-declining method,

Straight - Line Depreciation Percentage = 100% ÷ 7 years = 14.29%,

Year 2021,

2 x 14.29% x $48,894 ($73,337 - $24,443) = $13,969