Question

A combine costing $32,000.00 has a trade-in value of $5,000.00 after 8 years. Compute the book value after 2 years and the depreciation charge in year 3 for

a. The straight-line method

b. The sum-of-the-years-digits method

c. The simple declining-balance method

d. The complex declining-balance method

Answer 1

a. Straight-line method Depreciation expense per year = (Cost - Salvage Value) / Useful life = (32,000 - 5,000) / 8 = $3,375 Beginning book value Depreciation expense Ending book value Year 1 $32,000 $3,375 $28,625 Year 2 28,625 3,375 25,250 Book value after 2 years = $25,250 Depreciation charge in 3 year = $3,375

b. Sum-of-the-years-digits method SYD = 1+2+3+4+5+6+ 7+8 = 36 Depreciable amount = Cost - Salvage Value = 32,000 - 5,000 = $27,000 Beginning book value Depreciation expense Ending book value Year 1 $32,000 (8/36) *27,000 = $6,000 $26,000 Year 2 26,000 (7/36)*27,000 = 5,250 20,750 Book value after 2 years = $20,750 Depreciation charge in year 3 = (6/36) *27,000 = $4,500

c. Simple declining-balance method SL depreciation rate = (1/ Useful life) * 100 = (1/8) * 100 = 12.5% Simple declining-balance method depreciation rate = 1 * SL depreciation rate = 1 * 12.5% = 12.5% Beginning book value Depreciation expense Ending book value Year 1 $32,000 32,000*12.5% = $4,000 $28,000 Year 2 28,000 28,000*12.5% = 3,500 24,500 Book value after 2 years = $24,500 Depreciation charge in year 3 = 24,500*12.5% = $3,062.5

d. Complex declining-balance method (Double declining-balance method) SL depreciation rate = (1/ Useful life) * 100 = (1/8) * 100 = 12.5% DDB depreciation rate = 2 * SL depreciation rate = 2 * 12.5% = 25% Beginning book value Depreciation expense Ending book value Year 1 $32,000 32,000*25% = 8,000 $24,000 Year 2 24,000 24,000*25% = 6,000 18,000 Book value after 2 years = $18,000 Depreciation charge in year 3 = 18,000*25% = $4,500