Calculation of depreciation charge:- | |||||||
Straight Line Depreciation Method :- | |||||||
Depreciation Expense | = | Depreciable Amount | |||||
Useful Life | |||||||
Depreciable Amount | = | Cost - Salvage value | |||||
Cost | = | $280,000 | |||||
Salvage value (residual value) | = | $33,000 | |||||
Useful life | = | 4 | years | ||||
Depreciable Amount | = | $280,000 | - | $33,000 | |||
= | $247,000 | ||||||
Straight line Depreciation Rate | = | 100 | |||||
4 | |||||||
= | 25.00% | ||||||
STARIGHT-LINE DEPRECIATION | |||||||
Computation | End of Year | ||||||
Years | Depreciable Cost | × | Depreciation Rate | = | Annual Depreciation Expense | Accumulated Depreciation | Book Value (280000-Accumulated Depreciation) |
2022 | $247,000 | × | 25.00% | = | $ 61,750 | $ 61,750 | $ 218,250 |
2023 | $247,000 | × | 25.00% | = | $ 61,750 | $ 123,500 | $ 156,500 |
2024 | $247,000 | × | 25.00% | = | $ 61,750 | $ 185,250 | $ 94,750 |
2025 | $247,000 | × | 25.00% | = | $ 61,750 | $ 247,000 | $ 33,000 |
Double Declining Balance Method :- | |||||||
Cost | = | $280,000 | |||||
Salvage value (residual value) | = | $33,000 | |||||
Useful life | = | 4 | years | ||||
Straight line Depreciation Rate | = | 100 | |||||
4 | |||||||
= | 25.00% | ||||||
Double (200%) Declining Balance Depreciation Rate | = | 2 * 25% = 50% | |||||
Depreciation Rate | = | 50% | |||||
DOUBLE DECLIING BALANCE DEPRECIATION | |||||||
Year | Computation | End of Year | |||||
Beginning of Period Book Value | × | Depreciation Rate | = | Depreciation Expense | Accumulated Depreciation | Book Value | |
2022 | $ 280,000 | × | 50.00% | $ 140,000 | $ 140,000 | $ 140,000 | |
2023 | $ 140,000 | × | 50.00% | $ 70,000 | $ 210,000 | $ 70,000 | |
2024 | $ 70,000 | × | 50.00% | $ 35,000 | $ 245,000 | $ 35,000 | |
2025 | $ 35,000 | × | 5.71% | $ 2,000 | $ 247,000 | $ 33,000 | |
Depreciation expense of 2025 | = | Beginning Book Value | - | Salvage Value | |||
= | $ 35,000 | - | $33,000 | ||||
= | $ 2,000 | ||||||
Depreciation expense for 2025 is adjusted so that ending book value is equal to salvage value | |||||||
Depreciation Rate for 2025 | = | $ 2,000 | / | $ 35,000 | |||
= | 5.71% |
Straight Line Depreciation Method results in higher reported 2022 income because straight line depreciation is less than the double declining balance depreciation in 2022 |
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