On January 2, 2021, the Jackson Company purchased equipment to be used in its manufacturing process. The equipment has an estimated life of eight years and an estimated residual value of $50,125. The expenditures made to acquire the asset were as follows: Purchase price $220,000
Freight charges 6800
Installation charges 10,000

Jackson's policy is to use the double-declining-balance (DDB) method of depreciation in the early years of the equipment's life and then switch to straight line halfway through the equipment's life.

Required:
Calculate depreciation for each year of the asset's eight-year life.

Jackson Company

Calculation of the Depreciation for each year:

a) Using the double-declining-balance (DDB) method of depreciation:

1st year, the depreciation charge = $59,200 ($236,800 x 25%)

2nd year, the depreciation charge = $44,400 ($236,800 - 59,200) x 25%

3rd year, the depreciation charge = $33,300 ($236,800 - 103,600) x 25%

4th year, the depreciation charge = $24,975 ($236,800 - 136,900) x 25%

5th year, the usage of  straight-line method commences:

Depreciation charge = $58,100/4 = $14,525

6th year, depreciation charge = $14,525

7th year, depreciation charge = $14,525

8th year, depreciation charge = $14,525

Explanation:

a) Asset's recognized cost:

Purchase price       $220,000

Freight charges            6,800

Installation charges    10,000

Total cost =            $236,800

b) Useful life = 8 years, with salvage value of $50,125.

c) Double-declining balance depreciation rate = 25% (100/8 * 2)

d) Accumulated Depreciation at the end of:

1st year = $59,200

2nd year = $103,600 ($59,200 + 44,400)

3rd year = $136,900 ($103,600 + 33,300)

4th year = $128,575 ($136,900 + 24,975)

5th year = $143,100 ($128,575 + 14,525)

6th year = $157,625 ($143,100 + 14,525)

7th year = $172,150 ($157,625 + 14,525)

8th year = $186,675 ($172,150 + 14,525)

e) Book value of asset at the end of the fourth year:

Cost = $236,800

Accumulated depreciation $128,575

Book value = $108,225

Salvage value = $50,125

Straight-line depreciable amount  = $58,100

f) The double-declining-balance depreciation method is an accelerated depreciation method that expenses the cost of an asset more rapidly by multiplying the straight-line method's rate by 2 and applying this rate on the reducing balance.  On the other hand, the straight-line depreciation method uses the same amount of depreciation each year over an asset's useful life.  The double-declining balance method does not take into consideration the salvage value unlike the straight-line depreciation method until towards the end of the useful life of the asset.

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