Alison and Carl are civil engineers who own a soil- and water-analysis business

Question

Alison and Carl are civil engineers who own a soil- and water-analysis business for which they have purchased computer equipment for $25,000. They do not expect the computers to have a positive salvage or trade-in value after the anticipated five-year life. For book-depreciation purposes, they want book-value schedules for the following methods: straight line; declining balance; and double declining balance. They want to use a fixed depreciation rate of 25% annually for the declining-balance model. Use a spreadsheet or hand computation to develop the schedules.

Explanation / Answer

Working notes:

(1) Straight line (SLM) depreciation per year = Cost / Useful life = $25,000 / 5 = $5,000

(2) SLM depreciation rate = 1 / Useful life = 1 / 5 = 0.2, or 20%

Double-declining balance (DDB) Method will have an annual depreciation rate of (2 x 20%) = 40%.

(a) SLM Year Beginning Book value ($) Annual depreciation ($) Ending book value ($) 1 25,000 5,000 20,000 2 20,000 5,000 15,000 3 15,000 5,000 10,000 4 10,000 5,000 5,000 5 5,000 5,000 0 (b) Declining balance Year Beginning Book value ($) Annual depreciation ($) Ending book value ($) (A) (B) = (A) x 25% (B) - (A) 1 25,000 6,250 18,750 2 18,750 4,688 14,063 3 14,063 3,516 10,547 4 10,547 2,637 7,910 5 7,910 1,978 5,933 (c) DDB Year Beginning Book value ($) Annual depreciation ($) Ending book value ($) (A) (B) = (A) x 40% (B) - (A) 1 25,000 10,000 15,000 2 15,000 6,000 9,000 3 9,000 3,600 5,400 4 5,400 2,160 3,240 5 3,240 1,296 1,944

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