Question
In: Accounting
A manufacturing company makes it a policy that for every new equipment purchased, the annual depreciation...
A manufacturing company makes it a policy that for every new equipment purchased, the annual depreciation cost should not exceed 25% of the first cost at any time without salvage value. Determine the length of service life if the depreciation used is the SYD method
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| A manufacturing company |
| We know, In SYD the largest depreciation charges is in first year. |
| So, d1= (C0-Cn)*(n/sum of years) |
| Where, d1= Depreciation in first year. C0= Cost of asset. Cn= Salvage value of asset. |
| As the annual depreciation cost should not exceed 25% of the first cost at any time without salvage value so the equation will reduce to: |
| .25C0= (C0-Cn)*(n/sum of years) |
| Or, 25C0/100= (C0-0)*(n/sum of years) because salvage value is zero. |
| Or, 25C0/100= C0*(n/sum of years) |
| Or, C0/4= C0*(n/sum of years) |
| Or, Sum of years= 4n |
| Now, using the A.P. formula for summation we know summation= n*(n+1)/2 |
| Or, 4n= n*(n+1)/2 |
| Or, 8n= n^2+n |
| Or, 8n-n= n^2 |
| Or, 7n= n^2 |
| Therefore n= 7 years. |
| So the length of service life if the depreciation used is the SYD method is 7 years. |
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