Question

EKU paid $100,000 for research equipment, which it believes will have zero salvage value at the end of its 5-year life. Compute the depreciation schedule using:

Straight line (SL)

Sum-of-Years’ Digits (SOYD)

Double Declining Balance (DDB)

Modified Accelerated Cost Recovery System (MACRS).

Answer 1

1. Straight line depreciation per annum= (Cost-residual value)/Useful life = (100,000-0)/5= $20,000

2. Sum of Years' Digits Method
Under this, the number of years are being added. So, teh sum of useful asset life is 1+2+3+4+5=15
Depreciation in 1st year= (5/15) of $100,000= $33,333.33
Depreciation in 2nd year= (4/15) of $100,000= $26,666.66
Depreciation in 3rd year= (3/15) of $100,000= $20,000
Depreciation in 4th year= (2/15) of $100,000= $13,333.33
Depreciation in 5th year= (1/15) of $100,000= $6,666.66

3.Double Declining Balance
Depreciation for a period = 2 x straight-line depreciation percent x book value at beginning of period.
Straight line depreciation percent= (20,000/100,000*100)= 20%
For year 1: Depreciation= 2*(20%)*100,000=$40,000
For year 2: Depreciation= 2*(20%)*60,000=$24,000
For year 3: Depreciation= 2*(20%)*36,000=$14,400
For year 4: Depreciation= 2*(20%)*21,600=$8,640
For year 5: Depreciation= 2*(20%)*12,960=$5,184+special adjustment for final year which in this case will be (12,960-5,184) to bring the salvage value equal to zero
For year 5: Depreciation= $5,184+ $7,776= $12,960

4. MACRS method
Depreciiation in 1st year= Cost*1/Useful life*A where A is 100% or 150% 0r 200%
Depreciation in subsequent yeras= (Cost-Depreciation in previous yeras)* 1/Recovery Period*A
Suppose A is taken as 200% by EKU.
Depreciation in year 1: $100,000*1/5*200%=$40,000
Depreciation in year 2: ($100,000-$40,000)*1/5*200%= $24,000
Depreciation in year 3: (100,000-40,000-24,000)*1/5*200%= $14,400
Depreciation in year 4: $10,600^
^Method will now cahnge to straight line beacuse the depreciation under MACRS method will be (100,000-40,000-24,000-14,400)*1/5*200%= $8,640 which is less than under straight line [(100,000-40,000-24,000-14,400)*1/2] or $10,600.
Depreciation in year 5: $10,600 (Stright line method)