Question

show all work and draw a cash flow diagram

NAME 1) DEPRECIATION A machine is purchased for $20,000 and has an expected life of 4 years The salvage value at the end of 5 years is $4,000. a) Calculate the annual depreciation according to: 1) The Straight Line Depreciation Method 2) The Sum of the Year's Digit (SOYD) depreciation method b) what is the book value of the machine under each depreciation scheme at the end of three (2) years?.

Answer 1

We are give the life as 4 years:

Cost	$20,000.00
Life	4
Salvage	$4,000.00

• Straight line method:
  • $Depreciation = \frac{Cost-Salvage}{Life}$
  • $Depreciation = \frac{20000-4000}{4}=4000$
  • Depreciation schedule is as follows:

  • Year	Opening balance	Investment	Depreciation	Closing balance
    0		$ 16,000.00		$16,000.00
    1	$16,000.00		$4,000.00	$12,000.00
    2	$12,000.00		$4,000.00	$8,000.00
    3	$8,000.00		$4,000.00	$4,000.00
    4	$4,000.00		$4,000.00	$                         -

  • Opening balance = previous year's closing balance
  • Closing balance = Opening balance+Investment-Depreciation
  • BV at the end of 2 years is $8000
• SOYD method:
  • Depreciation schedule is as follows:

  • Year	Fraction of depreciation	Opening balance	Investment	Depreciation	Closing balance
    0			$ 16,000.00		$16,000.00
    1	4/10=0.4	$16,000.00		0.4 x 16000=6400	$9,600.00
    2	3/10=0.3	$9,600.00		0.3 x 16000=4800	$4,800.00
    3	2/10=0.2	$4,800.00		0.2 x 16000=3200	$1,600.00
    4	1/10=0.1	$1,600.00		0.1 x 16000=1600	$                         -

  • Total of the year column = 10 therefore the denominator int eh fraction of depreciation calculation is 10
  • Opening balance = previous year's closing balance
  • Closing balance = Opening balance+Investment-Depreciation
  • BV at the end of 2 years is $4800