Question

Acme manufacturing purchased a new piece of equipment, on July 1^st, for 400,000. Additional cost were, $15,000 delivery, $18,000 installation, $7,000 taxes. It is anticipated this equipment will last 15 years and have a salvage value of $35,000. What would be the depreciation expense for this machine for the first and second year using the Straight Line method?

Using the previous example calculate the first and second year depreciation using the Sum of the Years Digits method and the Double Declining Balance?

Answer 1

Cost of equipment = $400,000 + $15,000 + $18,000 + $7,000 = $440,000

Depreciation under Straight-line method = (Cost - Salvage value) / Estimated useful life

= ($440,000 - $35,000) / 15

= $27,000

	Straight-line method
1st year	$27,000
2nd year	$27,000

Depreciation under Sum of the years digits method = (Cost - Salvage value) / Sum of the years digits percentage

Sum of the years digits percentage = Number of years left / [n(n+1)/2]

n(n+1)/2 = 15(15+1)/2 = 120

	Sum of years digits method
1st year	$25,313 [($440,000-$35,000)*15/120*0.5]
2nd year	$48,938 [($440,000-$35,000)*14.5/120]

Depreciation under Double declining balance method = (Cost - Accumulated depreciation) / Useful life * 2

	Double declining balance method
1st year	$29,333 [($440,000-$0)/15*2*1/2]
2nd year	$54,756[($440,000-$29,333)/15*2]