Question

On January 2, 2020, Rachel, Inc. purchased a new machine for its factory. The new machine cost

$55,000, has an expected useful life of 7 years and an estimated residual value of $5,000.

Prepare a depreciation schedule for the new machine using the following depreciation methods:

1) Straight Line (SL)

2) Sum-of-the-Years-Digits (SYD)

3) Declining Balance using twice the straight line rate (DDB)

4) Modified Accelerated Cost Recovery System (MACRS) (5 year asset class)

Answer 1

	Cost of Machine	55000
	Residual Value	5000
	Life	7 Years
1	Straight Line Method
	Year	Depreciation
	2020	7143
	2021	7143
	2022	7143
	2023	7143
	2024	7143
	2025	7143
	2026	7142
		50000
	Depreciation	= (Value of Assets - Residual Value) / Life of Assets
		=(55000-5000)/7
		=7143
2	Sum of the Year Digit Method
	Year	Depreciation Base	Remaining Life	Depreciation Fraction	Depreciation	Book Value
					=depreciation base x Depreciation Fraction
	1	55,000.00	7	7/28	13,750.00	41,250.00
	2	55,000.00	6	6/28	11,785.71	29,464.29
	3	55,000.00	5	5/28	9,821.43	19,642.86
	4	55,000.00	4	4/28	7,857.14	11,785.71
	5	55,000.00	3	3/28	5,892.86	5,892.86
	6	55,000.00	2	2/28	3,928.57	1,964.29
	7	55,000.00	1	1/28	1,964.29	0.00
			28
3	Declining Balance using twice the straight line rate (DDB)
	Year	Book Value	Depreciation	Book Value (Year End)
	1	55,000.00	15,719.00	39,281.00
	2	39,281.00	11,222.58	28,058.42
	3	28,058.42	8,016.29	20,042.13
	4	20,042.13	5,726.04	14,316.09
	5	14,316.09	4,090.11	10,225.98
	6	10,225.98	2,921.56	7,304.42
	7	7,304.42	2,304.42	5,000.00
	Cost of the asset = $ 55,000
	Salvage Value = $ 5,000
	The useful life of the asset = 7 years
	Depreciation rate = 1/useful life *100 = (1/7) * 100 = 14.29%
	Double-declining balance formula = 2 X Cost of the asset X Depreciation rate
	Here, it will be 2 x14.286 % = 28.58%
	Year 1 Depreciation = $55000 X 28.58% = $15719
	Year 2 Depreciation = $39281 x 28.58% = $11,222.58
	The final double declining balance depreciation expense was $ 2304.42 which is more than the actual $2086.87 (28.58% of $7,304.42 ). It was done to change the salvage value as estimated
4	MACRS Depreciation Table for 5 years
	Depreciation Rates (%)
	Year	Depreciation Rate	Value of Assets	Depreciation
	1	20	55000	11000
	2	32	55000	17600
	3	19.2	55000	10560
	4	11.52	55000	6336
	5	11.52	55000	6336
	6	5.76	55000	3168
	total			55000
	MACRS Depreciation rate are given in table, you can google for it or it is mentioned in your text books