Question

Cost $45,000; Salvage value:0; Useful life: 8 Calculate annual depreciation on this machinery using double-declining balance method. Be careful not to exceed the salvage value. If the salvage value is zero, switch to straightline in the year when straight-line yields higher depreciation. (use the remaining value as the starting point when you change)

Answer 1

Solution:

Cost = $45,000

Salvage value = $0

Life = 8 years

Depreciation as per SLM = $45,000 / 8 = $5,625

Depreciation rate - SLM = $5,625/$45,000 = 12.50%

Depreciation rate double declining balance method = 12.5%*2 = 25%

Computation of Depreciation and carrying value as per double declining method
Year	Depreciation	Accumulated Depreciation	Carrying Value
0			$45,000.00
1	$11,250.00	$11,250.00	$33,750.00
2	$8,437.50	$19,687.50	$25,312.50
3	$6,328.13	$26,015.63	$18,984.38
4	$4,746.09	$30,761.72	$14,238.28
5	$3,559.57	$34,321.29	$10,678.71
6	$2,669.68	$36,990.97	$8,009.03
7	$2,002.26	$38,993.23	$6,006.77
8	$1,501.69	$40,494.92	$4,505.08

At the end of year 5, carrying value is $10,678.71 and remaining life is only 3 years. Therefore staright line yields higher depreciation from 6th year onwards.

Therefore annual depreciation from 6th year to 8th year = $10,678.71/3 = $3,559.57

Computation of Annual Depreciation - Machinery
Year	Depreciation	Accumulated Depreciation	Carrying Value
0			$45,000.00
1	$11,250.00	$11,250.00	$33,750.00
2	$8,437.50	$19,687.50	$25,312.50
3	$6,328.13	$26,015.63	$18,984.38
4	$4,746.09	$30,761.72	$14,238.28
5	$3,559.57	$34,321.29	$10,678.71
6	$3,559.57	$37,880.86	$7,119.14
7	$3,559.57	$41,440.43	$3,559.57
8	$3,559.57	$45,000.00	$0.00