Question

Some construction company has bought a product for $200,000 with a life of three years, and a salvage value of $10,000. Tabulate depreciation and book value using MACRS, Double Declining Balance and straight-line methods. Which method gives the company the largest depreciation after two years?

Answer 1

Please rate the answer
Answer

Under MACS depreciation would be provided for 4 years and the salvage value of the asset would be reduced to zero .

Year	depreciation rate	Deprecation calculation	Book value at the end of the year
1	33.33%	66660 (33.33 % of 200000)	133340
2	44.45%	88900   (44.45 % of 200000)	44440
3	14.81%	29620   (14.81 % of 200000)	14820
4	7.41%	14820   (7.41 % of 200000)	0

Straight line method
The amount of depreciation remains same for three years. The depreciation amount is calculated as
=Original cost- Salvage value / life
= 200000-10000 /3
= 63333.3 $

Year	Depreciation	Book value at the end of the year
1	63333.33	136666.7
2	63333.33	73333.34
3	63333.33	10000.01

Double declining balance method
Under this method the depreciation is charged at double the rate of straight line method .
Depreciation rate under SLM = 100% / 3 = 33.33 %
DDB method rate = 2* 33.33% = 66.66%

Year	Book value at the beginning	Depreciation amount	Book value at the end
1	200000	133320 (66.66% of 200000)	66680
2	66680	44448.89 (66.66% of 66680)	22231.11
3	22231.11	14819.26 (66.66% of 22231.11)	7411.853

The largest depreciation is given by MACRS method after two years which is 88900 .