Question

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.

Answer 1

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