"Compute the depreciation each year of a machine that costs $30,000 to purchase and $5,300 to...

"Compute the depreciation each year of a machine that costs $30,000 to purchase and $5,300 to install with 10 years of life. Use DDB method (multiplier = 2) switching to straight line depreciation when appropriate. Assume a salvage value of $0. How much should be depreciated in year 9?"

Solutions

Expert Solution

Total cost of machine = Purchase cost + Installation cost

= $30000 + $5300

= $35300

Life of machine = 10 Years

Depreciation under straight line = Total cost / Life of the machine

= $35300 / 10

Per year depreciation = $3530

Straight line depreciation rate = $3530 / $35300 = 10%

Double decline depreciation rate = 2 * 10% = 20%

We switch from DDB to Straight line depreciation when depreciation in straight line is higher than DDB

Year	Book value	DDB rate	Depreciation	Remaining value	Straight line depreciation
1	35300.00	20%	7060.00	28240.00	3530
2	28240.00	20%	5648.00	22592.00	3530
3	22592.00	20%	4518.40	18073.60	3530
4	18073.60	20%	3614.72	14458.88	3530
5	14458.88	20%	2891.78	11567.10	3530
6	11567.10	20%	2313.42	9253.68	3530
7	9253.68	20%	1850.74	7402.95	3530
8	7402.95	20%	1480.59	5922.36	3530
9	5922.36	20%	1184.47	4737.89	3530
10	4737.89	20%	947.58	3790.31	3530

In year 5 depreciation under Straight line is higher than the DDB method. Hence we should switch to the straight line method.

Depreciation in year 9 = $3530

Rahul Sunny answered 11 months ago

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