An analyst gathered the following information about a fixed asset purchased by a company: • Purchase price $12,000,000 • Estimated useful life 5 years • Estimated salvage value $2,000,000 Using the double-declining-balance depreciation method, the company’s depreciation expense in Year 2 will be closest to: A. $2,000,000. B. $2,400,000. C. $2,880,000. D. $7,680,000. I calculated the answer to be B, however the naswer is C, can some one please explain… Thanks
you probably used salvage value, DD you dont use it
Dear Acer, 1. Do as if you were using the straight line method. 2. then figure out the total percentage of the asset that is depreciated the first year and double it. 3. Each subsequent year, that same percentage is multiplied by the remaining balance to be depreciated. 4. At some point, the value will be lower than the straight-line charge, at which point, the double declining method will be scrapped and straight line used for the remainder of the asset’. This means the following: 1., 2. the total percentage using straight-line method gives 100 / 5 = 20 percent. If doubled, it gives us 40 percent. 3. The depreciation amount of the first year is thus 0.4 x 12,000,000 = 4,800,000. The remaining book value after year 1 would then be 12,000,000 - 4,800,000 = 7,200,000. Thus, the depreciation amount of year 2 equals 0.4 x 7,200,000 = $ 2,880,000. 4. Keep in mind that the amount using straight line would be 7,200,000 / 4 = 1,800,000 for year 2. Since it is inferior to 2,880,000, the correct amound of depreciation changes at some time after year 2. All in all, answer C is correct. Daniel www.berufsexamen.de
use your calculator + functions on your CFA approved calculator… *** understand the method — but learn to use your calculator — you save a ton of time that way. Year 1: 40% * 12 Mill = 4.8 Mill Year 2: 40% ( 12 - 4.8 ) = 2.88 Mill. Book value at this time = 12 - (4.8+2.88) = 4.32, which is still above the salvage value of 2 Million.