Question

A machine which cost $300,000 is acquired on October 1, 2014. Its estimated salvage value is $30,000 and its expected life is eight years.

Instructions

(1) Calculate depreciation expense for 2014 and 2015 by each of the following methods, showing the figures used.

(a) Double-declining balance

(b) Sum-of-the-years'-digits

(2) At the end of 2015, which method results in the larger accumulated depreciation amount?

(Please explain how the percentages and fractions in months are derived)

Answer 1

Double Declining Balance Method

Depreciation % per year under straight line method = 100/8 = 12.5%

Amount to be depreciated = 300,000-30,000 = 270,000

Depreciation % under double declining method = 12.5%*2 = 25%

Depreciation exp for 2014 = 270,000*25% = $67,500

Machine value at the beginning of 2015 = 270,000-67,500 = 202,500

Depreciation exp for 2015 = 202,500*25% = $50,625 Double Declining Balance Method Depreciation % per year under straight line method = 100/8 = 12.5% Amount to be depreciated = 300,000-30,000 = 270,000 Depreciation % under double declining method = 12.5%*2 = 25% Depreciation exp for 2014 = 270,000*25% = $67,500 Machine value at the beginning of 2015 = 270,000-67,500 = 202,500 Depreciation exp for 2015 = 202,500*25% = $50,625 Sum of Digit Method Depreciation expense for 2014 = 300000*8/(8+7+6+5+4+3+2+1) * 3/12 Depreciation expense for 2014 = $ 16,667 Depreciation expense for 2015 = 300000*8/(8+7+6+5+4+3+2+1) * 9/12 + 300000*7/(8+7+6+5+4+3+2+1) * 3/12 Depreciation expense for 2015 = $ 64,583 Straight Line Meethod Amount to be depreciated = 300,000-30,000 = 270,000 Use Full Life= 8 Year Annual Depreciation= $270000/8=$33750 Depreciation for 2014= $33750 Depreciation for 2015=$33750