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A million-dollar oil drilling rig has a 6-year depreciable life and a $75,000 salvage value at...

A million-dollar oil drilling rig has a 6-year depreciable life and a $75,000 salvage value at the end of that time. Determine which one of the following methods provides the preferred depreciation schedule: DDB or SOYD. Show the depreciation schedule for the preferred method.

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Answer #1

SOYD method is the preferred method. Because DDB method will not reach the salvage value and will result in capital gain at the end of the life of the asset.

The depreciation schedule is given below:

Sum of the Years = N(N+1) / 2 = 6(6 + 1) / 2 = 21

Depreciable base = Cost of the asset - Salvage value = 1,000,000 - 75,000 = $925,000

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