Question

Halcrow Yolles purchased equipment for new highway construction in Manitoba, Canada, costing $500,000 Canadian. The estimated salvage at the end of the expected life of 5 years is $50,000. Various acceptable depreciation methods are being studied currently. Determine the depreciation for year 2 using the DDB(Double Declining Balance), 150% DB(Declining Balance), and SL(Straight Line Depreciation) methods.

Answer 1

Solution :

Method I : SL method

Cost of equipment = $ 500,000

Salvage value = $ 50,000

Expected life = 5 years

Depreciation = $\frac{\text{(cost of equipment - salvage value)}}{\text{expected life}}$

                      $=\frac{(500,000-50,000)}{5}$

                      = 90,000

Therefore, the $\text{depreciation}$ is $ 90,000 using the SL method.

Method II : DDB method

Cost of equipment = $ 500,000

Expected life = 5 years

So, calculating the $\text{depreciation}$ at the end of the year 1 is :

Depreciation = $\text{cost of equipment }\times \frac{2}{\text{expected life}}$

                      $=500,000\times \frac{2}{5}$

                     = $ 200,000

So the book value at the end of the year 1 = $ 500,000 - $ 200,000

                                                                      = $ 300,000

Now calculating the $\text{depreciation}$ at the end of the year 2 is :

Depreciation = $\text{book value at the end of year 1 }\times \frac{2}{\text{expected life}}$

                      $=300,000\times \frac{2}{5}$

                     = $ 120,000

Therefore, the $\text{depreciating}$ value is $ 120,000 using the DDB method.

Method III : 150% DB method

Cost of equipment = $ 500,000

Expected life = 5 years

So, calculating the depreciation in year 1 is :

Depreciation = $\text{cost of equipment }\times \frac{1.5}{\text{expected life}}$

                      $=500,000\times \frac{1.5}{5}$

                     = $ 150,000

So the book value at the end of the year 1 = $ 500,000 - $ 150,000

                                                                      = $ 350,000

Now calculating the depreciation in year 2 is :

Depreciation = $\text{book value at the end of year 1 }\times \frac{1.5}{\text{expected life}}$

                      $=350,000\times \frac{1.5}{5}$

                     = $ 105,000

Therefore, the $\text{depreciating}$ value is $ 105,000 using the 150% DB method.