In: Economics
JLMB Company owns earth moving equipment that cost ?98,000. After 8 years, it will have estimated salvage value of ?18,000. Compute the depreciation charge for each of the first two years and the book value at the end of 4 years by each of the following three methods of depreciation: a. straight line method; b. sum-of-the-years digit method; and c. double declining balance method.
a . By using straight line method
Depreciation amount =( I -S )/ n
=( 98000 - 18000) / 8 = 10000
Depreciation charge for first year = 10000
Depreciation charge for second year = 10000
Book Value at the end of the 4 years = 58000
End of the year | Initial cost | Depreciation Amount | Book Value |
0 | 98000 | - | 98000 |
1 | 10000 | 88000 | |
2 | 10000 | 78000 | |
3 | 10000 | 68000 | |
4 | 10000 | 58000 | |
5 | 10000 | 48000 | |
6 | 10000 | 38000 | |
7 | 10000 | 28000 | |
8 | 10000 | 18000 |
b . By using sum -of - the - years degit method
Depreciation amount for the year = [(n - t +1 ) * ( I - S ) ] / N
Where, N = sum of years upto the life span ( n )
I = Initial investment , S = salvage value , n = life span of the asset
N = 8 + 7 + 6 +5 +4 + 3 + 2 +1 = 36
Depreciation base = Initial cost - salvage value
End of the year | Initial cost | Depreciation Base |
Depreciation Rate | Depreciation Amount |
Book Value |
0 | 98000 | ||||
1 | 80000 | 8 / 36 | 17777.78 | 62222.22 | |
2 | 80000 | 7 / 36 | 15555.56 | 46666.66 | |
3 | 80000 | 6/ 36 | 13333.33 | 33333.33 | |
4 | 80000 | 5/ 36 | 11111.11 | 22222.22 | |
5 | 80000 | 4/ 36 | |||
6 | 80000 | 3/ 36 | |||
7 | 80000 | 2/ 36 | |||
8 | 80000 | 1/ 36 |
c. Using double decling balance method.
Depreciation rate = 2 / n
= 2 / 8 = .25
Depreciation amount for first year = Book value at the begining of period * .25 = 98000 *.25 = 24500
Depreciation amount for second year = ( Book value at the begining of period ) * .25 = ( 98000 -24500 ) *.25 = 18375
Depreciation amount for third year = ( previous year book value ) * .25 = ( 73500 -18375 ) *.25 = 13781.25
Depreciation amount for fourth year = ( previous year book value ) * .25 = ( 55125 - 13781.25 ) *.25 = 10336
Book value at the end of 4 year = previous year book value - 4th year depreciation amount
= 41343.75- 10336= 31,007.75