In: Economics
"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?"
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