Question

An asset for drilling was purchased and placed in service by a petroleum production company. Its cost basis is $144700, and it has an estimated market value of $29360 at the end of an estimated useful life of 7 years.

a) Compute the depreciation payments using SL (straight line) method.
b) Use DDB (Double declining balance) method and calculate the depreciation payments. (If it is necessary switch to SL)

excel plz!

Answer 1

Cost of drilling = $144,700

Salvage Value = $29,360

Life = 7 years

a) Method = Straight Line

Depreciated Amount in each year is calculated as: [(Cost of drilling machine - Salvage Value) / Life]

Value at the end of each year is calculated as Value in beginning of the year - Depreciated Amount

Year	Value in beginning of the year	Depreciated Amount	Value at the end of the year
1	144,700.0	16,477.1	128,222.9
2	128,222.9	16,477.1	111,745.7
3	111,745.7	16,477.1	95,268.6
4	95,268.6	16,477.1	78,791.4
5	78,791.4	16,477.1	62,314.3
6	62,314.3	16,477.1	45,837.1
7	45,837.1	16,477.1	29,360.0

Value at the end of year 7 = Salvage Value = 29,360

b) Method = Double declining balance

Depreciation rate of each year = 2 * (1 / Useful Life) = 28.57%

Depreciated amount in each year = Value in beginning of the year * Depreciation rate

If we wants to have the salvage value of $29,360 using this method, we need to reduce the life of cost drilling machine because using this method, salvage value have reduced to 13,726.9

Year	Value in beginning of the year	Depreciated Amount	Value at the end of the year
1	144,700.0	41,342.9	103,357.1
2	103,357.1	29,530.6	73,826.5
3	73,826.5	21,093.3	52,733.2
4	52,733.2	15,066.6	37,666.6
5	37,666.6	10,761.9	26,904.7
6	26,904.7	7,687.1	19,217.7
7	19,217.7	5,490.8	13,726.9