What Depreciation method to use

CFA Level I
#1

The Haynes Company takes a full year’s depreciation expense in the acquisition year and no depreciation in the disposal year. The following information is given on a depreciable asset: Acquisition date 1/1/X3 Estimated useful life 5 years Residual value $ 20,000 Cost 110,000 Accumulated depreciation as of 12/31/X3 30,000 What is the depreciation expense for year 2 based on the above information? a. 18000 b. 22000 c. 24000 d. 30000 I got the answer of this but took 3 minutes to get it (using hit and trial) How do we determine what depreciation method to use? Correct answer id 24000.

#2

what trial and error method did you apply and how? whats the cost of the asset once you acquired it and how much are you depreciating over 5 yrs? 90k? or 60k?

#3

In 1 year has a depreciation of 30,000, the asset is depreciated for 4 years (no depreciation in the last year, but has a salvage value of 20,000. It cannot be straight line, has to be an accelerated depreciation. SOYD: (Cost-Salvage)*years remaining/sum of years digit=90*5/15=30, so we found it. SOYD next year: 90*4/15=24000, C.

#4

Calculated depreciation using SYD/DDB for 1 yr depreciation to match up with 30000 Cost $110,000 Question asked for 2 yr depreciation so did not calculate for 5 yrs though.

#5

Thanks map1

#6

wow FSA. you really ahve to go over this stuff few times before it makes sense.

#7

hmm, it looks easy we need to allocate 90,000 for 5 years and we know that the first pmt = 30,000 --> it’s not SLM DDB: 2/5*90,000 = 36,000 --> it’s not DDB SYD: 90,000 * (5-1+1)/5 = 30,000 --> here it is!

#8

gogiants Wrote: ------------------------------------------------------- > > DDB: 2/5*90,000 = 36,000 --> it’s not DDB > why are you doing it over 90k? do it at your book value, which is 80k after first’s year of depreciation .4 x 80 = 32k

#9

DDB is at Book value, so year 1 would be 110,000*2/5=44, the following year would have deducted the depreciation from the book value of the asset and multiply by the same 2/5. Either one of the accelerated methods: be carefull not to depreciate more than permited (whenever there is a salvage value, leave it in the book value at the end of the depreciation).

#10

DDM: my bad … and i know it cold but somehow put different figure. Hate these mistakes