Question

1.      A million-dollar oil drilling rig has a 6-year depreciable life and a $75,000 salvage value at the end of that time. Determine which one of the following methods provides the preferred depreciation schedule: DDB or SOYD. Show the depreciation schedule for the preferred method.

Answer 1

SOYD is to be used as the DDB will never reach the salvage value and hence will result is capital gain at the end of the useful life.
	Year	Opening balance	Depreciation	Closing Balance
	1	1000000	264285.7	735714.3
	2	735714.3	220238.1	515476.2
	3	515476.2	176190.5	339285.7
	4	339285.7	132142.9	207142.9
	5	207142.9	88095.24	119047.6
	6	119047.6	44047.62	75000
	Year 1 depreciation =
	Depreciable amount		1000000 - 75000 =		925000
	Sum of years=		1+2+3+4+5+6 =		21
					44047.62
	Depreciation -
	Year	Year factor	Depreciation per factor	Depreciation for the year(Year factor x depreciation per factor)
	1	6	44047.62	264285.7
	2	5	44047.62	220238.1
	3	4	44047.62	176190.5
	4	3	44047.62	132142.9
	5	2	44047.62	88095.24
	6	1	44047.62	44047.62
				925000