Question

An asset for drilling was purchased and placed in service by a petroleum production company. Its cost basis is $60,000, and it has an estimated market value of $12,000 at the end of an estimated useful life of 14 years. Compute the annual depreciation amount and the BV at the end of each year using declining balance method with switchover to straight line method.

Answer 1

Given information;

Cost of Asset for drilling = $ 60,000

Market value at the end of useful life = $ 12,000

Useful life of the asset = 14 years

Method of Depreciation = declining balance method with switchover to straight line method

In the said method, depreciation is caluclated using decling balance for early years and then switches to straight line method. The year that better for switching is the year in which you wil get an equal or larger deduction by switching.

Caluclation of Depreciation by declining balance method;

Depreciation = Closing book value / 14

Accumulated depreciation = Depreciation up to the year

Remaining depreciable Value = Carrying Value - residual value - depreciation for the year

Book value = Carrying value - Accumulated depreciation

	IV/14		[60,000-12,000- (I)]	(60,000 - II)
	Depreciation (I)	Accumulated Depreciation (II)	Remaining depreciable Value (III)	Book Value (IV)
Opening				60,000.00
1	4,285.71	4,285.71	43,714.29	55,714.29
2	3,979.59	8,265.31	39,734.69	51,734.69
3	3,695.34	11,960.64	36,039.36	48,039.36
4	3,431.38	15,392.02	32,607.98	44,607.98
5	3,186.28	18,578.31	29,421.69	41,421.69
6	2,958.69	21,537.00	26,463.00	38,463.00
7	2,747.36	24,284.36	23,715.64	35,715.64
8	2,551.12	26,835.47	21,164.53	33,164.53
9	2,368.89	29,204.37	18,795.63	30,795.63
10	2,199.69	31,404.06	16,595.94	28,595.94
11	2,042.57	33,446.62	14,553.38	26,553.38
12	1,896.67	35,343.29	12,656.71	24,656.71
13	1,761.19	37,104.49	10,895.51	22,895.51
14	1,635.39	38,739.88	9,260.12	21,260.12

Caluclation of depreciation by Straight line method;

	60000/14
	Depreciation (I)	Accumulated Depreciation (II)	Remaining depreciable Value (III)	Book Value (IV)
Opening				60,000.00
1	4,285.71	4,285.71	43,714.29	55,714.29
2	4,285.71	8,571.43	39,428.57	51,428.57
3	4,285.71	12,857.14	35,142.86	47,142.86
4	4,285.71	17,142.86	30,857.14	42,857.14
5	4,285.71	21,428.57	26,571.43	38,571.43
6	4,285.71	25,714.29	22,285.71	34,285.71
7	4,285.71	30,000.00	18,000.00	30,000.00
8	4,285.71	34,285.71	13,714.29	25,714.29
9	4,285.71	38,571.43	9,428.57	21,428.57
10	4,285.71	42,857.14	5,142.86	17,142.86
11	4,285.71	47,142.86	857.14	12,857.14
12	4,285.71	51,428.57	-3,428.57	8,571.43
13	4,285.71	55,714.29	-7,714.29	4,285.71
14	4,285.71	60,000.00	-12,000.00	-

Caluclating depreciation by declining balance method with switchover to straight line method,

	Depreciation as per declining balance method	Depreciation as per Straight line method	Remarks	Depreciation as per Declining switch to straight line method
1	4,285.71	4,285.71		4,285.71
2	3,979.59	4,285.71	In this year wil get an equal or larger deduction by switching.	4,285.71
3	3,695.34	4,285.71		4,285.71
4	3,431.38	4,285.71		4,285.71
5	3,186.28	4,285.71		4,285.71
6	2,958.69	4,285.71		4,285.71
7	2,747.36	4,285.71		4,285.71
8	2,551.12	4,285.71		4,285.71
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