Question

Chapter 11 3. Equipment bought at cost of $25,000 is being considered for depreciation accounting using either the SOYD (sum-of-years-digit method) or SL (straight-line) method. If this asset will be depreciated over a period of 5 years with a salvage value of $5,000, determine the percentage increase in depreciation charges in year 2 for the SOYD method over the SL method. A. 10% B. 33% C. 0% D. -33.33%

Answer 1

Compute the depreciation expenses under sum-of-years-digit method (SOYD), using the equation as shown below:

Depreciation = {(Equipment cost – Salvage value)*(1 + Remaining life of asset)}/ Sum of estimated life of asset

                      = {($25,000 - $5,000)*(1 + 3)}/ (5 + 4 + 3 + 2 + 1)

                      = $20,000*4/15

                      = $5,333.33333332

Hence, the depreciation expenses under SOYD is $5,333.33333332.

Compute the depreciation expenses under the straight-line method, using the equation as shown below:

Depreciation expense = (Equipment cost – Salvage value)/ Estimated life

                                   = ($25,000 - $5,000)/ 5 years

                                   = $4,000

Hence, the depreciation expenses are $4,000.     

Compute the percentage increase in depreciation if SOYD method is used, using the equation as shown below:

Percentage increase = {(Depreciation under SOYD – Depreciation under Straight line)/ Depreciation under Straight line}

                                   = {($5,333.33333332 - $4,000)/$4,000}

                                   = 33.33% or 33% (round off)

Hence, the percentage increase in depreciation is 33%.