Question

An asset has an initial cost of $60,000, a salvage value of $5,000, and a depreciation life of 6 years. a) Determine the book value for year 3 using sum-of-the-years-digits depreciation. b) Determine the depreciation for year 3 using double declining balance depreciation. c) Determine the equivalent annual capital recovery plus a 12% return for year 3, assuming declining balance depreciation.

Answer 1

solution :

given that the asset has initial cost of $60000

also given a salavage value of $50000 and a depreciation life of 6 years

(a)

year	depreciation base	remaining life nof machine	depreciation factor	depreciation expense	book value
1	55000	6	6/21	15714	44286
2	55000	5	5/21	13095	31190
3	55000	4	4/21	10476	20714
4	55000	3	3/21	7857	12857
5	55000	2	2/21	5238	7619
6	55000	1	1/21	2619	5000
		21

therefoe , book value for year 3 using sum of the years digitd depreciation is 20714

(b) determination of depreciation for 3yaers using double decline blance method

useful life = 6 yeras

slm rate =1/6= 16.67% per year

depreciation rate for double declinig balance method = 16.67%*2=33.33% per year

year	book value at beginning	depreciation rate	depreciation expense	book value at end
1	60000	33.33%	20000	40000
2	40000	33.33%	13333	26667
3	26667	33.33%	8889	17778

depreciation forthe year 3 using double declining method is 8889

(c)

determination of equivalant capital recvery plus 12% return for the year 3 =

year	depreciation capital recovery
1	17857.4
2	10629.2
3	6326.94