Question

The Shop Right Shopping Complex purchased a delivery van for $33,850. The van has a useful life of five years and an estimated salvage value at $1,250. Prepare a depreciation schedule for the van using the (a) double-declining balance method (b) sum-of-the-year's digit method.

Answer 1

(a) double-declining balance method

In double-declining balance method, depreciation is charged at twice the rate of depreciation as per the straight line method.

double-declining balance method = 2*cost of the asset*depreciation rate

depreciation rate = (1/useful life)*100 = (1/5)*100 = 0.2*100 = 20%

So depreciation will charged on beginning balance of asset at 20%*2 = 40% rate every year till asset's ending balance is equal to asset's salvage value. 5th year depreciation of useful life will difference between beginning book value of year 5 - salvage value.

Year	Beginning book value	depreciation	Ending book value
1	$33,850.00	$13,540.00	$20,310.00
2	$20,310.00	$8,124.00	$12,186.00
3	$12,186.00	$4,874.40	$7,311.60
4	$7,311.60	$2,924.64	$4,386.96
5	$4,386.96	$3,136.96	$1,250.00

Calculation

(b) sum-of-the-year's digit method

This is an accelerated method depreciation where most of the depreciation is charged in the initial years.

first we calculate value to be depreciated as cost of the asset - salvage value = $33,850 - $1,250 = $32,600

now we calculate sum of useful life and discount factors as below:

Sum of useful life = 5+4+3+2+1 = 15

at the beginning of 1st year useful life is 5 years. at the beginning of 2nd year useful life is 4 years and so on.

Discount factors:

Year 1 - 5/15

Year 2 - 4/15

Year 3 - 3/15

Year 4 - 2/15

at year 5, depreciation will be the remaining balance i.e. the beginning book value of year 5 so that year 5 ending book value is zero.

Year	Beginning book value	depreciation	Ending book value
1	$32,600.00	$10,866.67	$21,733.33
2	$21,733.33	$8,693.33	$13,040.00
3	$13,040.00	$6,520.00	$6,520.00
4	$6,520.00	$4,346.67	$2,173.33
5	$2,173.33	$2,173.33	$0.00

Calculation