Straight Line and Double Declining Balance - Depreciation Methods

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S2000magician

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michaelgrogan wrote:I refer to Example 10; Reading 25 on Page 176. I have the answers written down - I just wish for clarification.
Assume the cost of computer equipment is $11,000, estimated residual value is $1,000 and estimated useful life is five years.
1 ) Straight Line Method: Am I right in saying that the depreciation balance of $2,000 in the first year does not vary based on residual value as in the double declining balance method? i.e. For years 1 through 5, the depreciation amount is $2,000 every year?
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Yes.
michaelgrogan wrote:2) Double Declining Balance Method:
- 5 years = 20% depreciation each year.
- 20%*0.2 = 40%
Yr 1 Depreciation: 11000*0.4 = 4400
Residual Value = 11000-4400 = 6600
Yr 2 Depreciation: 6600*0.4 = 2640
Residual Value = 11000-7040 = 3960
Yr 3 Depreciation: 3960*0.4 = 1584
Residual Value = 11000-8624 = 2376
Yr 4 Depreciation: 2376*0.4 = 950.4
Residual Value = 11000 - 9574 = 1426
Yr 5 Depreciation: 1426*0.4 = 570.4 (Less than $1,000 residual Value, hence Net Book Value in Year 5 is $1000)
Have I calculated this correctly, and is residual value not subtracted in this manner in the straight-line method? Many thanks.
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Your calculations are correct. However, your parenthetical is incorrect as written: you’re not comparing the depreciation amount ($570) to the salvage; you’re comparing the residual ($855 = $1,426 - $570 (with rounding)) to the salvage.
The residual value isn’t subtracted anywhere. In straight line depreciation it isn’t needed, as the calculation ensures that you won’t depreciate past the salvage value; in double-declining balance it isn’t used in the calculation, so you need to compare it to the salvage each time to ensure that you don’t depreciate past the salvage value.
By the way, you can check your calculations easily in Excel using the depreciation functions SLN and DDB.
 
Thank you, that makes sense. Would you recommend using the financial calculator for this or is it easier to work it out in theory? I know how to calculate SL on BA II Plus, but is there a way of calculating DDB?
 
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