Your bosses at the residential contracting firm has asked you to help them decide about whether they should keep a particular item of construction equipment or accept an offer for sale. The equipment cost $126,000 new and it has a useful life of eight years. The firm has been using a double declining balance (DDB) method of depreciation and this is the third year of ownership. Your firm has received an offer to purchase the item (at the end of this third year of ownership) for $60,000. However, your bosses only will sell if doing so will make a profit. To help your bosses decide whether or not they should sell the equipment, calculate the remaining book value at the end of year 3 (the anticipated time of sale).

The remaining book value at the end of year 3 is $53,156.25 < Selling price

The Bosses should sell the equipment.

Explanation:

Under the straight-line method, useful life is 8 years, so the asset's annual depreciation will be 12.5% of the Depreciable cost.

Depreciable cost = Total asset cost - salvage value =  $126,000-$0 = $126,000

Under the double-declining-balance method the 12.5% straight line rate is doubled to 25% - multiplied times the Depreciable cost's book value at the beginning of the year.

In the first year, depreciation expense = 25% x $126,000 = $31,500

At the beginning of the second year, the Depreciable cost's book value is $126,000-$31,500 = $94,500

Depreciation expense in second year = 25% x $94,500 = $23,625

At the beginning of the year 3, the Depreciable cost's book value is $94,500-$23,625 = $70,875

Depreciation expense in second year = 25% x $70,875 = $17,718.75

Accumulated depreciation at the end of year 3 = $31,500  + $23,625 + $17,718.75 = $72,843.75

The remaining book value at the end of year 3 = Total asset cost - Accumulated depreciation at the end of year 3 = $126,000 - $72,843.75 = $53,156.25 < $60,000 (Selling price)

The Bosses should sell the equipment.

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