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eternityfrens
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Posted: 18 Sep 2009 at 21:41 \| IP Logged

A plant asset under construction by a firm for its own use was completed at the end of the current year. The following costs were incurred:

Materials $60,000

Labor 30,000

Incremental overhead 10,000

Capitalized interest 20,000

The asset has a service life of 10 years, estimated residual value of $10,000, and will be depreciated under the double-declining balance method. At completion, the asset was worth $105,000 at fair value. What amount of depreciation will be recognized on the asset in total over its service life?

Ans = 95,000

In DDB method residual value is not subtracted so why is residual value subtracted in this question?

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Zeratul
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Posted: 18 Sep 2009 at 21:55 \| IP Logged

Even though DDB does not deduct salvage value from the depreciable base in calculating the depreciable amount, the total depreciation over the economic life of the asset cannot drop the book value below salvage value. Thus the total depreciation would equal book value-salvage value.

bryris
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Posted: 18 Sep 2009 at 23:17 \| IP Logged

So are we assuming an immediate impairment of the asset? Costs to construct were $120,000. Why isn't the answer $110,000?

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eternityfrens
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Posted: 19 Sep 2009 at 00:36 \| IP Logged

Entire 120,000 is eligible for capitalization but Fair value of the asset is 105,000 so 15,000 will be recognized as loss on construction

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