Question

2.46 An assembly line conveyor system with a 5-year life is to be depreciated by the DDB method. The conveyor units had a first cost of $30,000 with a $9000 salvage value. The annual operating cost al- located to the conveyor is $7000 per year. The book value at the end of year 2 is closest to: a. $6,480 b. $10,800 $12,400 $18,000

Answer 1

Life of the system = 5years depreciation method followed is doubling balance (DDB) first cost = $30,000 savage value = $9000 annual operating cost = $7000 per year double declining balancing method: formulae: ratio = 2/n where n = life of asset = 5 years rate = 2/5 = 0.40 rate 40% rate of depreciation under double declining balance method = 40% calculation of book value of the asset: Bv_n = p(1-d)^n where n = time period p = initial cost of the asset d = rate of depreciation \r\n from the given information we have initial cost of the asset (p) = 30,000 time period(n) = 2 rate of depreciation (d) = 40% by substituting the above values, we get Bv_2 = $30,000(1-0.40)^2 Bv_2 = $30,000(0.60)^2 Bv_2 = $30,000 times 0.36 Bv_2 = $10,800 therefore book value of the cost of the end of year 2 is closest to $10,800 therefore the option is (b)