Double Declining Depre

CFA Level I FRA
#1

Double declining DEPRE:

Hi friends,

I just watched a video about DDD and I thought, I got this, I am going to do the excercise. Well this didn’t happen, somehow I am not getting even closer to the truth.

The story goes like this: ACME Corp. purchase a new stamping machine for 100,000, paid 10,000 for shipping, 5000 for installation.Based on an estimated salvage value of 25, 000and an economic life of six years, the difference between straight line depreciation and double declining balance depreciation in the 2nd year of the asset’s life is:

A-7220

B-10,556

C-16,666

Correct is B

Here s the answer and my headache with it:

Straight line DEPRE is (100,000+10,000+5000-25,000)/6=15,000 p/y.

DDD in the 2nd year is: 115,000 (2/3)(1/3)=25,556. The difference is 10,556.

Salvage value is not part of the Declining balance calulation

I really don’t understand how they are doing this excercise, and why they explain so poorly…or there s something really obvious in the answer.

Thank you

The Owl

#2

The straight line rate is 1/6, so the DDB rate is 2/6 = 1/3.

In the first year the depreciation is $115,000(1/3) = $38,333, and the ending book value is $76,667 (= $115,000 − $38,333 = $115,000(2/3)).

In the second year the depreciation is $76,667(1/3) = $115,000(2/3)(1/3) = $25,556.

For whatever it’s worth, the depreciation in the third year is $115,000(2/3)²(1/3) = $17,037, in the fourth year it would be $115,000(2/3)³(1/3) = $11,358, but that drops us below the salvage value.

#3

Thank you Magician your answers do justice to your name.

So I stop depreciating below salvage.

Also, how do they get to the answer of 10, 556?

would that be DDB of 25,556-SL of 15,000?

I was substacting the depreciation from Book value for SL and DDB, instead of just caring about the depreciation amout.

I think I got it

The Owl

#4

Yes: $10,556 is $25,556 − $15,000.

At the beginning of year 4 the book value is $34,074, so in year 4 you can take only $9,074 in depreciation (whereas ⅓ of $34,074 is $11,358).

By the way, Excel has a built-in double declining balance depreciation function (DDB); you should put some numbers in and see for yourself what you get. It’s great for checking your work.

#5

Once you understand how to do it by hand, the DEPR button on your calculator (if you’re using a TI baii plus professional) will let you do double declining depreciation.