Chapter 7

Question 1

Sum-Of-The-Years’ Digits

Answer 1

Accelerated depreciation uses decreasing charge methods, including the sum-of-the-years’ digits (SYD), providing higher depreciation costs in earlier years and lower depreciation charges in later periods. Under the SYD method, the depreciation rate percentage for each year is calculated as the number of years in remaining asset life for the same year divided by the sum of remaining asset life every year through the asset’s life. As the depreciation rate decreases over time, so does the depreciation charge.

It makes sense to use an accelerated depreciation method such as the SYD method when an asset will lose most of its value toward the beginning of its useful life — as is the case with automobiles, for example. In the five-year example above, the SYD method would yield the following depreciation schedule:

Year 1: 5/15 = 33%
Year 2: 4/15 = 27%
Year 3: 3/15 = 20%
Year 4: 2/15 = 13%
Year 5: 1/15 = 7%
The percentages for all these years should add up to 100%.

SYD = n(n+1)/2
Then multiply the percentage by the asset cost - residual(salvage) cost)

5/15 * ($30,000-$4,000)
4/15 * ($30,000-$4,000)

Question 2

Double-declining balance method

Answer 2

The double declining balance depreciation (DDB) method, also known as the reducing balance method, is one of two common methods a business uses to account for the expense of a long-lived asset. The double declining balance depreciation method is an accelerated depreciation method that counts as an expense more rapidly (when compared to straight-line depreciation that uses the same amount of depreciation each year over an asset’s useful life). Similarly, compared to the standard declining balance method, the double declining method depreciates assets twice as quickly.

As a hypothetical example, suppose a business purchased a $30,000 delivery truck, which was expected to last for 10 years. After 10 years, it would be worth $3,000, its salvage value. Under the straight-line depreciation method, the company would deduct $2,700 per year for 10 years–that is, $30,000 minus $3,000, divided by 10.