Question

Cost: 178,000 Residual: 3,000 #of years: 5

DDB				YR	%	DEPREC	BK VAL
							178,000
				YR 1	0.40	71,200	106,800
				YR 2	0.40
				YR 3	0.40
				YR 4	0.40
				YR 5	0.40		3,000
						175,000
							178,000
MACRS					YR 1	0.2000
					YR 2	0.3200
					YR 3	0.1920
					YR 4	0.1152
					YR 5	0.1152
					YR 6	0.0576

Answer 1

The Depreciation expenses and the Book value under the Double Declining balance and MACRS method can be calculated as follows :-

i.) Double Declining Balance Method

Year	Depreciable Base	%	Depreciation Expense	Book Value
1	1,78,000	40%	71,200	1,06,800
2	1,06,800	40%	42,720	64,080
3	64,080	40%	25,632	38,448
5	38,448	40%	15,379	23,069
t	23,069	86.99%	20,069	2,999

The Double declining balance method of depreciation is an accelerated system of depreciation. The Double declining balance of depreciation is calculated as follows :-

Double declining balance method = 2 * Straight line depreciation * Carrying value of the asset

To calculate double declining balance depreciation-

Step 1:- Divide 100 by number of years

100/5 = 20%

Step 2:- Now multiply into 2

20% * 2 = 40%

As noted above, the first 4 years, we see that the depreciation has been charged at the rate of 40%. However, for the 5th year, depreciation can be calculated as under :-

$23,069 * 40% = $9,228.

However, the life of the machine is only 5 years as per the question with a salvage value of $3,000

Hence the Depreciation charged during Year 5 would be calculated by -

Cost of asset - Salvage value - Accumulated Depreciation until beginning of the year

$178,000 - $3,000 - $154,931 (Depreciation expense year 1 - year 4)

=$20,069.

As such, Depreciation charges for 5th year will be $20,069

ii.) MACRS Depreciation Method

Year	MACRS Percentage	Cost	MACRS Cost Recovery
1	20.00%	178,000	35,600
2	32.00%	178,000	56,960
3	19.20%	178,000	34,176
4	11.52%	178,000	20,506
5	11.52%	178,000	20,506
6	5.76%	178,000	10,253
TOTAL MACRS DEPRECIATION			178,000

Please note that for MACRS depreciation, there would not be any consideration of the Salvage value for Depreciation cost recovery purposes.