Murgatroyd Co. purchased equipment on January 1, 2019, for $900,000, estimating a five-year useful life and $100,000 residual value. In 2019 and 2020, Murgatroyd depreciated the asset using the double-declining-balance method. In 2021, Murgatroyd changed to straight-line depreciation for this equipment. What depreciation would Murgatroyd record for the year 2021 on this equipment?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Murgatroyd Co. purchased equipment on January 1, 2019, for $900,000, estimating a five-year useful life and $100,000 residual value. In 2019 and 2020, Murgatroyd
Double declining depreciation rate = Straight line depreciation rate x 2
= (100/5 years) x 2
= 40%
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