Question

Name Date L. STRAIGHT LINE DEPRECIATION The next two problems provide a closer look at Straight Line versus Double Declining Balance Depreciation. In these problems, assume all machinery is bought at the first of the year. Salvage Value Useful Life 1) Tractor A 2) Tractor B 3) Combine Cost 60,000 75,000 98,000 20,000 Assume you own the machinery above. Calculate annual depreciation using the straight-line method. Tractor A Taector Combine Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Answer 1

a)Straight line Method

Tractor ATractor BCombine

Year 1 $                                         8,000 $            15,000 $                             14,000

Year 2 $                                         8,000 $            15,000 $                             14,000

Year 3 $                                         8,000 $            15,000 $                             14,000

Year 4 $                                         8,000 $            15,000 $                             14,000

Year 5 $                                         8,000 $            15,000 $                             14,000

Year 6 $                             14,000

Year 7   $                             14,000

Formula(Original Cost of Asset less Salavage Value)/Useful years of life

CostSalvage ValueUseful Life Depreciation

Tractor A $                                       60,000 $            20,0005($60000-$20000)/5 $                                                  8,000

Tractor B $                                       75,000 $                     -   5($75000-0)/5 $                                                15,000

Combine $                                       98,000 $                     -   7($98000-0)/7 $                                                14,000

b)Double Declining method

Rate of Dep(100%/No. of useful years of life)*2

Tractor A(100%/5)*240%

Tractor A(100%/5)*240%

Combine(100%/7)*229%

Tractor ATractor BCombine

Year 1 $                                       24,000 $            30,000 $                             28,420

Year 2 $                                       14,400 $            18,000 $                             20,178

Year 3 $                                         1,600 $              9,000 $                             14,327

Year 4 $                                                -   $              9,000 $                               8,769

Year 5 $                                                -   $              9,000 $                               8,769

Year 6 $                               8,769

Year 7   $                               8,768

Depreciation Schedule

Tractor A

YearOpening Book ValueDep Rate%DepreciationAccumulated DepreciationYear End Value

   (Cost*Dep rate)  

1 $                                       60,00040% $                             24,000 $                                       24,000 $                                                36,000

2 $                                       36,00040% $                             14,400 $                                       38,400 $                                                21,600

3 $                                       21,60040% $                               1,600 $                                       40,000 $                                                20,000

** In year 3 Net End Value should not exceed the Salavage Value of $20000

Hence though actual depreciation is $21600*40% $        8,640.00

but deprecition would be $1600

Effectively %rate of dep in year 3  $1600/$21600

7.41%

Tractor B

YearOpening Book ValueDep Rate%DepreciationAccum DepreciationYear End Value

   (Cost*Dep rate)  

1 $                                       75,00040% $                             30,000 $                                       30,000 $                                                45,000

2 $                                       45,00040% $                             18,000 $                                       48,000 $                                                27,000

3 $                                       27,000Straight Line $                               9,000 $                                       57,000 $                                                18,000

4 $                                       27,000Straight Line $                               9,000 $                                       66,000 $                                                  9,000

5 $                                       27,000Straight Line $                               9,000 $                                       75,000 $                                                         -  

In Year 3 the depreciation under double declining is less than depreciation calculated under Straight line

Hence for remaining useful life of 3 years dep would be calculated under Straight line method at value $27000

Depreciation $27000/3

$9,000

Combine

YearOpening Book ValueDep Rate%DepreciationAccum DepreciationYear End Value

   (Cost*Dep rate)  

1 $                                       98,00029% $                             28,420 $                                       28,420 $                                                69,580

2 $                                       69,58029% $                             20,178 $                                       48,598 $                                                49,402

3 $                                       49,40229% $                             14,327 $                                       62,925 $                                                35,075

4 $                                       35,075Straight Line $                               8,769 $                                       71,693 $                                                26,307

5 $                                       20,982Straight Line $                               8,769 $                                       80,462 $                                                17,538

6 $                                       20,982Straight Line $                               8,769 $                                       89,231 $                                                  8,769

7 $                                       20,982Straight Line $                               8,769 $                                       98,000 $                                                          0

In Year 4 the depreciation under double declining is less than depreciation calculated under Straight line

Hence for remaining useful life of 4 years dep would be calculated under Straight line method at Value $35075

Depreciation $35075/4

$                                         8,769