Question

A profitable company making earthmoving equipment is considering a research investment of $100K on equipment that will have a 5 year useful and $20K salvage value. If the money is worth 10%, which one of the following methods of depreciation would be preferable? a) Straight line b) Sum of years' digits c) Double declining balance d) Modified accelerated cost recovery system

A profitable company making earthmoving equipment is considering a research investment of $100K on equipment that will have a 5 year useful and $20K salvage value. If the money is worth 10%, which one of the following methods of depreciation would be preferable? a) Straight line b) Sum of years' digits c) Double declining balance d) Modified accelerated cost recovery system

Answer 1

Sum of years' digits method is used on the basis of the assumption that the asset productivity decreases with the passing of time, therefore, it is an accelerated method of calculating depreciation on an asset. Straight line method of charging depreciation is used to expense an asset over a longer period of time by dividing the difference between the cost of an asset & its expected residual value by its estimated useful life. Double declining balance method is also a form of accelerated depreciation method in which the depreciation is charged at double the rate at which it is done in the straight line method. Modified accelerated cost recovery system is a system of depreciation used for tax purposes in the US, It provides for faster depreciation in the initial years of asset's life and slower depreciation later on, which could prove to be beneficial for businesses as per tax perspective. Considering the above, it can be said that in the given question, Straight line method would be preferable as the information about the asset's useful life and salvage value have been provided, which would help in calculating the amount of depreciation easily as per this method.