Question

A machine, purchased for $60,000 had a depreciable life of 4 years. It will have an expected salvage value of $10,000 at the end of the depreciable life. What is the difference (in absolute value) in the book value at the end of year 2 between the straight line and double declining methods?  (Report your answer in dollar amounts without any extra character. Answers such as 2Million; 2M; 2,000,000 or $2000000 are not acceptable)

Answer 1

Straight-line (SLM) annual depreciation ($) = (Cost - salvage value) / Life = (60000 - 10000) / 4 = 50000 / 4 = 12500

In year 2, SLM depreciation = $12500

SLM depreciation rate = 1/Life = 1/4 = 0.25

Double declining (DDB) depreciation rate = 2 x SLM rate = 2 x 0.25 = 0.5

DD method ignores salvage value.

In year 1, DDB depreciation ($) = 60000 x 0.5 = 30000

Book value at end of year 1 ($) = 60000 - 30000 = 30000

In year 2, DDB depreciation ($) = 30000 x 0.5 = 15000

In year 2, difference between DDB and SLM depreciation ($) = 15000 - 12500 = 2500