Question

1. A piece of equipment was purchased new at $35,000. The salvage value is $1500 after its 8 year service life. Determine the depreciation and blue book value for the life of the asset, assuming:

a) straight line depreciation

b) MACRS (use 5 yr table)

c) SOYD method

d) DDB method

Answer 1

(a) SL method

Annual depreciation ($) = (Cost - Salvage value) / Life = (35,000 - 1,500) / 8 = 33,500 / 8 = 4,187.5

SLM
Year	Asset Cost ($)	Annual Depreciation ($)	End-of-Year Book Value ($)
1	35,000.0	4,187.5	30,812.5
2	30,812.5	4,187.5	26,625.0
3	26,625.0	4,187.5	22,437.5
4	22,437.5	4,187.5	18,250.0
5	18,250.0	4,187.5	14,062.5
6	14,062.5	4,187.5	9,875.0
7	9,875.0	4,187.5	5,687.5
8	5,687.5	4,187.5	1,500.0

(b) MACRS

This method ignores salvage value.

MACRS
Year	Beginning-of-year Book Value ($)	Depreciation Rate (%)	Annual Depreciation ($)	End-of-Year Book Value ($)
1	35,000.00	20	7,000.00	28,000.00
2	28,000.00	32	8,960.00	19,040.00
3	19,040.00	19.2	3,655.68	15,384.32
4	15,384.32	11.52	1,772.27	13,612.05
5	13,612.05	11.52	1,568.11	12,043.94
6	12,043.94	5.76	693.73	11,350.21

(c) SOYD method

Sum-of-years-digit (SOYD) = 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 = 36

Annual depreciation in year N = (Cost - Salvage value) x (Number of years remaining at beginning of year N / SOYD)

= $(35,000 - 1,500) / (Number of years remaining at beginning of year N / SOYD)

= $33,500 / (Number of years remaining at beginning of year N / SOYD)

SOYD
Year	Cost ($)	Depreciation Rate	Annual Depreciation ($)	End-of-Year Book Value ($)
1	33,500	8/36	7,444.44	26,055.56
2	33,500	7/36	6,513.89	19,541.67
3	33,500	6/36	5,583.33	13,958.33
4	33,500	5/36	4,652.78	9,305.56
5	33,500	4/36	3,722.22	5,583.33
6	33,500	3/36	2,791.67	2,791.67
7	33,500	2/36	1,861.11	930.56
8	33,500	1/36	930.56	0.00

(d) DDB Method

SLM depreciation rate = 1/Useful life = 1/8 = 0.125

DDB Depreciation rate = 2 x SLM rate = 2 x 0.125 = 0.25

Depreciation schedule is as follows. This method ignores salvage value.

DDB
Year	Beginning-of-year Book Value ($)	Depreciation Rate	Annual Depreciation ($)	End-of-Year Book Value ($)
1	35,000.00	0.25	8,750.00	26,250.00
2	26,250.00	0.25	6,562.50	19,687.50
3	19,687.50	0.25	4,921.88	14,765.63
4	14,765.63	0.25	3,691.41	11,074.22
5	11,074.22	0.25	2,768.55	8,305.66
6	8,305.66	0.25	2,076.42	6,229.25
7	6,229.25	0.25	1,557.31	4,671.94
8	4,671.94	0.25	1,167.98	3,503.95