Accelerated Depreciation

Submitted by Ramkumar001 on Fri, 01/25/2013 - 04:31

Hi all,


A $1000 item with a 10 yearsuseful life and no salvage value(How much item is worth at the end of the its life)


Ans:Depreciated at $180 in first Yesr


$150 Second year


$130 third etc


But  i am thinking this should be $200, $160,$128,Can you please help me out whether i am correct?


Source of this example from Rita 7th Ed page no 109


Thanks,


Ram


 

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admin

Fri, 01/25/2013 - 04:36

What is the rationale for your answer ?

Ramkumar001

Fri, 01/25/2013 - 04:41

Life is 10 Years & no salvage


So 1000/10=10 as this is accelerated a took 10*2=20 per ysar(1000/10=10*2=20)


1 Year=1000*20/10=200


2 Year=800*20/100=160


3 Year =640*20/100=128


thanks,


Ram

Ramkumar001

Fri, 01/25/2013 - 06:38

Any clue?


$200, $160,$128


0r


$180,$150,$130 ( I don't know how this calculation value comes-This one from rita 7th ed book page 109)


Can you please help me out


Thanks,


Ram

admin's picture

admin

Fri, 01/25/2013 - 06:50

The difference in the answer is because there are two methods to calculate accelarated depreciation. You are using Double Declining Balance (DDB) method and she is using Sum of the Year Digits Depreciation method. The only reason Sum of the Year Digits Depreciation applies here is because she has mentioned the keyword "useful life left"

The formula for Sum of the Years Digits Depreciation is:

(Years of useful life left / (10+9+8+7+6+5+4+3+2+1)) x (original cost - salvage value)

In year 1, Company  depreciation expense using the Sum of the Years Digits method would be:

(1 / (10+9+8+7+6+5+4+3+2+1)) x ($1,000- $0) = $181.8

THat is the only other formula I know.