Question

Project Management

1. The company treasurer must determine the best depreciation method for office furniture that costs $50,000 and has a zero salvage value at the end of a 10 year depreciable life. Compute the depreciation schedule using: (a) Straight line (b) Double declining balance (C) Sum-of-years' -digits (d) Modified Accelerated Cost Recovery System (MACRS)

Answer 1

(a) Straight-line (SLM) method

SL annual depreciation = Cost / Useful life = 50,000 / 10 = 5,000

SLM depreciation schedule as follows.

Year	Beginning-of-year Book Value ($)	Annual Depreciation ($)	Accumulated Depreciation ($)	End-of-Year Book Value ($)
1	50,000	5,000	5,000	45,000
2	45,000	5,000	10,000	40,000
3	40,000	5,000	15,000	35,000
4	35,000	5,000	20,000	30,000
5	30,000	5,000	25,000	25,000
6	25,000	5,000	30,000	20,000
7	20,000	5,000	35,000	15,000
8	15,000	5,000	40,000	10,000
9	10,000	5,000	45,000	5,000
10	5,000	5,000	50,000	0

(b) DDB method

SLM depreciation rate = 1/Useful life = 1/10 = 0.1

DDB rate = 2 x SLM rate = 2 x 0.1 = 0.2

DDB depreciation schedule as follows.

DDB
Year	Beginning-of-year Book Value ($)	Depreciation Rate	Annual Depreciation ($)	Accumulated Depreciation ($)	End-of-Year Book Value ($)
1	50,000	0.2	10,000	10,000	40,000
2	40,000	0.2	8,000	18,000	32,000
3	32,000	0.2	6,400	24,400	25,600
4	25,600	0.2	5,120	29,520	20,480
5	20,480	0.2	4,096	33,616	16,384
6	16,384	0.2	3,277	36,893	13,107
7	13,107	0.2	2,621	39,514	10,486
8	10,486	0.2	2,097	41,611	8,389
9	8,389	0.2	1,678	43,289	6,711
10	6,711	0.2	1,342	44,631	5,369

(c) SOYD

Sum-of-years-digit (SOYD) = 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 = 55

Annual depreciation in year N = (Cost - Salvage Value) x (Number of years remaining at beginning of year N / SOYD)

= 50,000 x (Number of years remaining at beginning of year N / 55)

SOYD Depreciation schedule as follows.

SOYD
Year	Cost ($)	Depreciation Rate	Annual Depreciation ($)	Accumulated Depreciation ($)	End-of-Year Book Value ($)
1	50,000	10/55	9,091	9,091	40,909
2	50,000	9/55	8,182	17,273	32,727
3	50,000	8/55	7,273	24,545	25,455
4	50,000	7/55	6,364	30,909	19,091
5	50,000	6/55	5,455	36,364	13,636
6	50,000	5/55	4,545	40,909	9,091
7	50,000	4/55	3,636	44,545	5,455
8	50,000	3/55	2,727	47,273	2,727
9	50,000	2/55	1,818	49,091	909
10	50,000	1/55	909	50,000	0

(d) MACRS

MACRS Depreciation schedule as follows.

MACRS
Year	Cost ($)	Depreciation Rate (%)	Annual Depreciation ($)	Accumulated Depreciation ($)	End-of-Year Book Value ($)
1	50,000	10.00	5,000	5,000	45,000
2	50,000	18.00	9,000	14,000	36,000
3	50,000	14.40	7,200	21,200	28,800
4	50,000	11.52	5,760	26,960	23,040
5	50,000	9.22	4,610	31,570	18,430
6	50,000	7.37	3,685	35,255	14,745
7	50,000	6.55	3,275	38,530	11,470
8	50,000	6.55	3,275	41,805	8,195
9	50,000	6.56	3,280	45,085	4,915
10	50,000	6.55	3,275	48,360	1,640
11	50,000	3.28	1,640	50,000	0