Question

Answer the following multiple-choice question. You have to select the correct option and provide a complete correct solution.

b. A small pump costs $20,000 and has a life of eight years. The pump will have a $4,000 SV at that time. If the 150% DB method is used to depreciate the pump, the BV at the end of year five is approximately equal to i. $5,000 ii. $6,000 iii. $7,000 iv. $8,000

Answer 1

Correct option is (iii).

DB method ignores salvage value.

Straight-line (SL) depreciation rate = 1 / Useful life = 1 / 8 = 0.125

150% DB depreciation rate = 1.5 x SL rate = 1.5 x 0.125 = 0.1875

150% DB depreciation schedule as follows.

Year	Beginning-of-year Book Value ($)	Depreciation Rate	Annual Depreciation ($)	Accumulated Depreciation ($)	End-of-Year Book Value ($)
1	20,000	0.1875	3,750	3,750	16,250
2	16,250	0.1875	3,047	6,797	13,203
3	13,203	0.1875	2,476	9,272	10,728
4	10,728	0.1875	2,011	11,284	8,716
5	8,716	0.1875	1,634	12,918	7,082