Question

The Acasti Pharma hospital purchased a medical treatment machine at a cost of $ 90,000 five years ago. After 5 years’ useful life, this machine has an estimated salvage value of $20,000. Calculate the amount of annual depreciation & its book value:
a. By using the straight line method
b. By using the DDB method

Answer 1

a. straight line method

depreciation= (cost-salvage value)/no. of years

=(90000-20000)/5

=14000.

so every year 14000 will be deducted as depreciation.

year 1

BV at the end of year=BV in beginning - depreciation

= 90000-14000

=76000

year 2

BV at the end of year=BV in beginning - depreciation

=76000-14000

=62000.

year 3

BV at the end of year=BV in beginning - depreciation

=62000-14000

=48000

year 4

BV at the end of year=BV in beginning - depreciation

=48000-14000

=34000

year 5
BV at the end of year=BV in beginning - depreciation

=34000-14000

=20000.

b. DDB method

depreciation percentage=(1/n)*2

=(1/5)*2

=0.40 or 40%

year 1

depreciation=BV in beginning* depreciation percentage

=900000*40%

=36000.

BV at the end of year=BV in beginning - depreciation

=90000-36000

=54000

year 2

depreciation=BV in beginning* depreciation percentage

=54000*40%

=21600.

BV at the end of year=BV in beginning - depreciation

=54000-21600

=32400

year 3

depreciation=BV in beginning* depreciation percentage

=32400*40%

=12960

so here when we deduct this depreciation amount will be less than 20000 that is salvage value so we will deduct 12400 to maintain the salvage value.

BV at the end of year=BV in beginning - depreciation

=32400-12400

=20000.

year 4 and year 5.

depreciation value will be zero and book value will be 20000.