sample CPA question 1

On January 1, 2006, Frank company purchased equipment for $200,000. The equipment has an 8 year expected useful life and a $10,000 expected residual value. Initially, Frank Company used double-declining balance depreciation. On January 1, 2008, Frank Company changed to straight line depreciation. The expected useful life and residual value are unchanged. Compute depreciation expense for 2008.
Using double-declining balance the depreciation taken for 2006 = 200,000 x 25% (residual value is not used in double-declining balance) =50,000

Depreciation for 2007 = 200,000 x 25% = 50,000. This leaves a remaining depreciable book vale of $100,000. The remaining depreciable bookvalue is depreciated over 6 years using the new straight line method. Since straight line depreciation does consider residual value in its calculation the reaming 6 years of depreciation would be calculated as follows: 100,000 – 10,000 (residual value) = 90,000 / 6 = 15,000.

This is not one of the choices. What am I not taking into consideration??

CaptainForest

What aren’t you considering?

When using double declining balance….you must adjust the BV every year.

So the 2007 depreciation expense would be:

200,000 – 50,000 = 150,000 x 25%

Not 200,000 x 25% each year.