Question

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You just purchased a piece of equipment that cost $899,000, has a salvage value of $322,000,...

You just purchased a piece of equipment that cost $899,000, has a salvage value of $322,000, and a useful life of 11 years.

How much depreciation can be taken each year using Straight Line Depreciation?
How much depreciation can be taken each year using Double Declining Depreciation?
How much depreciation can be taken each year using Sum of Years Depreciation?
Which approach would potentially provide you with the biggest tax savings in year 11?

Expert Solution

Approach 1 : Straight Line Depreciation

Staright Line depreciation = (Cost of Asset - Salavage, Value )/Useful life

=(899,000 - 322,000) 11

=52,454.54 is the depreciation for each year.

Approach 2 : Double Declinig Depreciation

Cost	8,99,000.00
Salvage Value	3,22,000.00
Useful life	11 years

Year	Beginning Book Value	Depreciation Rate	Depreciation Expense	Accumulated Depreciation	Ending Book Value
1	8,99,000.00	18.18%	1,63,454.55	1,63,454.55	7,35,545.45
2	7,35,545.45	18.18%	1,33,735.54	2,97,190.08	6,01,809.92
3	6,01,809.92	18.18%	1,09,419.98	4,06,610.07	4,92,389.93
4	4,92,389.93	18.18%	89,525.44	4,96,135.51	4,02,864.49
5	4,02,864.49	18.18%	73,248.09	5,69,383.60	3,29,616.40
6	3,29,616.40	2.31%	7,616.40	5,77,000.00	3,22,000.00
7	3,22,000.00	0.00%	-	5,77,000.00	3,22,000.00
8	3,22,000.00	0.00%	-	5,77,000.00	3,22,000.00
9	3,22,000.00	0.00%	-	5,77,000.00	3,22,000.00
10	3,22,000.00	0.00%	-	5,77,000.00	3,22,000.00
11	3,22,000.00	0.00%	-	5,77,000.00	3,22,000.00

Working Notes:

Double Declining Depreciation Rate = 2 x Straight Line Depreciation Rate

Staright Line Depreciation rate = 1/ number of useful years

Double Declining Depreciation Rate = 2 x (1/11) =18.18%

In year 6 the book value is 3,29,616.40 depreciation for the year should not exceed 7616.4, ie the book value of asset cannot go beyond its salvage value. Therefor we have to plug in the value of depreciation and there by determine the depreciation rate.

From year 7 onwards depreciation willl be 0 as book value of asset already reached at its salvage value.

Approach 3 : Sum of Year Depreciation

Year	Depreciation Base	Remain Life	Depreciation Fraction	Depreciation Expense	End Book Value
1	577000	11	11/66	96,166.67	8,02,833.33
2	577000	10	10/66	87,424.24	7,15,409.09
3	577000	9	9/66	78,681.82	6,36,727.27
4	577000	8	8/66	69,939.39	5,66,787.88
5	577000	7	7/66	61,196.97	5,05,590.91
6	577000	6	6/66	52,454.55	4,53,136.36
7	577000	5	5/66	43,712.12	4,09,424.24
8	577000	4	4/66	34,969.70	3,74,454.55
9	577000	3	3/66	26,227.27	3,48,227.27
10	577000	2	2/66	17,484.85	3,30,742.42
11	577000	1	1/66	8,742.42	3,22,000.00
Total	66

Depreciation Rate for Each year in sum of digits method = Remainig Years / Sum of the years digits

Depreciable base = Cost - Salavge value

Which approach would potentially provide you with the biggest tax savings in year 11?

Straight Line Depreciation for year 11 = 52,454.54

Double declinig depreciation for year 11 = 0

Sum of years depreciation for year 11 = 8742.4

so , higher depreciation expense is as per straight line depreciation, there for this method will provide with biggest tax saving for year 11

jeff jeffy answered 1 year ago

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