A fixed asset with a five-year estimated useful life and no scrap value is sold at the end of the second year of its useful life. How would using the straight-line method of depreciation instead of the double-declining balance method of depreciation affect a gain or loss on the sale of the plant asset?

Question

Karter Bailey

Business

8 March, 01:57

A fixed asset with a five-year estimated useful life and no scrap value is sold at the end of the second year of its useful life. How would using the straight-line method of depreciation instead of the double-declining balance method of depreciation affect a gain or loss on the sale of the plant asset?

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Answers (2)

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Donna Giles · Answer 1

A gain would be less or a loss would be greater using straight-line depreciation.

Explanation:

Let me put amount in the question. Let the value of the fixed asset be $100,000.

Under the straight line depreciation method the annual depreciation amount for the 5 year period will be = $100,000/5 = $20,000 per year.

Depreciation rate = (depreciation amount) / (value of fixed asset) x 100%

= 20000/100000 x 100%

= 20%

Now accumulated depreciation at the end of 2nd year = 2 multiply by 20,000 = $40,000

Book value = $100,000 - $40,000 = $60,000

With the double-declining balance method, the depreciation rate = 2 multiply by straight line rate = 2x20% = 40%

Year Opening book value Depreciation Ending book value

1 100,000.00 40,000.00 60,000.00

2 60,000.00 24,000.00 36,000.00

Total accummulated depreciation$64,000.00

With the double declining balance method the accumulated depreciation amount is $64,000 and book value = $36,000.00

If the fixed asset is sold for $70,000 after 2 years then the gain as per the straight line method = $70,000 - $60,000 = $10,000. And in case of double declining balance method, the gain = $70,000 - $36,000 = $34,000. Double declining method will have a greater gain.

Expenses too will be affected differently. In case of straight line method the amount of expenses will be lower than double declining balance method as in case of double declining balance method the amount of depreciation expenses will be higher during the initial years.

Ronald Hatfield · Answer 2

Using straight line method over Double-declining balance method chances of loss or reduction in gain increases.

Explanation:

When we use straight line method it gives constant value that decrease the book value of plant assets while using double-declining balance method is reduce book value more aggressively in earlier years. Therefore, Book value of asset is much higher compare to double declining balance method hence, chances of loss or reduction in gain are obvious when we use the straight line method.