Depreciation

Example 8D: Depreciation

This example shows double-declining depreciation computed at a five-year useful life with no salvage value. As is often the case with a five-year life, the double-declining method is used for the first three years and the straight-line method is used for the remaining two years. The double-declining method first computes what the straight-line percentage would be. In this case 100% divided by five years equals 20%. The 20% is then doubled. In this case 20% times 2 equals 40%. Then the 40% is multiplied by the remaining balance to be depreciated. Thus 60,000 times 40% for year one equals 24,000 depreciation, with a remaining balance of 36,000. Then 36,000 times 40% for year two equals 14,400 depreciation, and 36,000 minus 14,400 equals 21,600 remaining balance, and so on.

Now note the difference in annual depreciation between Example 8B, using straight-line for all five years, and Example 8D, using the combined double-declining and straight-line methods.

Depreciation Expense Computation: Double-Declining-Balance

Five year useful life; $10,000 salvage value

Year #                            Annual Depreciation                        Remaining Balance

Beginning Balance =                                                                 60,000

1                                     24,000*                                               40,000

2                                     14,000*                                               40,000

3                                       8,640*                                               30,000

4                                       6,480**                                              20,000

5                                       6,480**                                              10,000

*double-declining balance depreciation

**straight-line depreciation for remaining two years (12,960 divided by 2 = 6,480/yr)

Practice Exercise 8–II: Depreciation

Compute the straight-line depreciation for each year for equipment with a cost of $50,000, a five-year useful life, and a $5,000 salvage value.

Assignment Exercise 8–4: Depreciation

Set up a purchase scenario of your own and compute the depreciation with and without salvage value.

Assignment Exercise 8–5: Depreciation Computation: Units-of-Service

Study the “Units of Service” portion of the chapter closely.

 Required

1. Using the format in Table 8–A-5, compute units of service depreciation using the following assumptions:

Cost to be depreciated = $50,000

Salvage value = zero

Total units of service = 10,000

Units of service per year: Year 1 = 2,200; Year 2 = 2,100; Year 3 = 2,300; Year 4 = 2,200; Year 5 = 200