Question

"Compute the depreciation each year of a machine that costs $68,000 to purchase and $3,100 to install with 10 years of life. Use DDB method (multiplier = 2) switching to straight line depreciation when appropriate. Assume a salvage value of $0. How much should be depreciated in year 8?"

Answer 1

Purchase Cost

$68,000

Installation Cost

$3,100

Total Cost

$71,100

Year

DDB Method

Remaining value

Straight line method

1

71,100*20% = 14,220

71,100 - 14,220 = 56,880

71,100/10 = 7,110

2

56,880*20% = 11,376

56,880 -11376 = 45504

56,880/9 = 6,320

3

45,504*20% = 9,100.8

45,504 - 9100.8 = 36403.2

45,504/8 = 5,688

4

36403.2 *20% = 7,280.6

36,403.2- 7,280.6 = 29122.6

36,403.2/7 = 5,200.5

5

29,122.6*20% = 5,824.5

29,122.6 - 5,824.5 = 23,298

23,298/6 = 3,883

6

23,298*20% = 4,659.6

23,298 - 4,659.6 = 18,638

23,298/5 = 4,659.6

In year 6 the depreciation value is same for both method and in 7th year DDB depreciation value is lesser than SLM depreciation method hence we switched to SLM method from year7. At year 8 depreciation value is $ 4,659.5

Depreciation using SLM in year 7

18,638/4 = 4,659.5

Remaining value

7

18,638*20% = 3,727.7

18,638 - 3,727.7 = 14910.8

18,638.4/4 = 4,659.6

18,638 - 4,659.5 = 13978.4

8

14910.8 *20% =2,982.1

14910.8 - 2,982.1 = 11928.6

14,910.8/3 = 4,970.3

13,978 - 4,659.5 = 9,318.9

9

11,928.6*20% = 2,385.7

11,928.6 - 2,385.7 = 9542.9

11,928.6/2 = 5,964.3

9,318.9 - 4,659.5 = 4,659.4

10

9,542.9*20% = 1,908.6

9,542.9 - 1,1908 =7634.3

9,452.9/1 = 9,452.9

4,659.4- 4,659.5 = 0

Depreciation applied for each year