Question

DDB over 5 years (not tax) End of year basis year 1 40.00% 60.00% year 2 24.00% 36.00% year 3 14.40% 21.60% year 4 8.64% 12.96% year 5 12.96% 0.00% Total 100.00% Questions: (these are not tax questions. Instead, these are critical thinking questions that will enable you to later appreciate the logic of MACRS) 1. Do you see something conceptually wrong with this table? In other words, the logic of accelerated depreciation is that we derive greater benefits from the asset in early years. According to that logic, what is wrong with this schedule? 2. Can you propose a solution or modification to the DDB depreciation schedule that would solve the problem you identified in question 1, but would still largely follow the DDB approach?

Answer 1

Let us first understand the concept of DDP approach , as unless you understand the basic concept , you can't understand what is wrong in the given table.

Below is the understanding of the concept and the calculation of the DDB rates.

First, Divide “100%” by the number of years in the asset's useful life, this is your straight-line depreciation rate. Then, multiply that number by 2 and that is your Double-Declining Depreciation Rate. In this method, depreciation continues until the asset value declines to its salvage value.

Answer:

1) The concept of accelerated depreciation is being violated in this question. As the rate of depreciation for the fifth year is more than the rate of depreciation for the fourth year. This is violating the principles of DDB . Thus is is both , logically as well as conceptually wrong.

2) Correct solution of this is given below :-

Year Calculation - Rate Balance loo (*) 2 40 40 60 .2 2 30 30 30 30 x 2 20 20 10 10 x2 = 10 10 Not Nie applicable