Waller Comp, purchased equipment for S24,000. The company is constdenne whether to determine annual depreciation using the straight-lane method or the declitung-balance method at 150 percent of the straight-1,1e tate. Waller expects to use the equipment for 10 years. At the end of which it will have an estimated salvage valueef 54.000. Prepare a comparison of these IWO alternatives for the fast two yews Waller will oun the equipment

Answer:

Waller Company

Comparison of Straight-line Depreciation and Declining Balance Methods

                                 Straight-line method          Declining balance method

Cost of equipment          $24,000                              $24,000

1st year depreciation exp.    1,860                                   2,760

Net book value                   22,140                                 21,240

2nd year depreciation exp.  1,860                                   2,371.50

Ner book value                  20,280                                18,868.50

Explanation:

a) Data and Calculations:

Cost of purchased equipment = $24,000

Duration of useful life = 10 years

Estimated salvage value = $5,400

Depreciable amount under the straight-line method = $18,600

Depreciation expense per year under the straight-line method = $1,860 ($18,600/10)

Under the declining balance method:

The depreciation rate = 10% * 150% = 15% per year

Depreciation expense for the first two years:

Year 1, 15% of $18,600 = $2,760

Year 2, 15% of ($18,600 - 2,760) = $2,371.50