Question

An asset for drilling was purchased and placed in service by a petroleum production company. Its cost basis is $60,000,and it has an estimated MV of $12,000 at the end of an estimated useful life of 14 years. Compute the depreciationamount in the thirdyear and the BV at the end of the fifth year of life by each of these methods:

Answer 1

Answer:

straight line depreciation:

depreciation expense per year, the same for every year = ($60,000 - $12,000) / 14 = $3,428.57

book value end of year 1 = $56,571.43

book value end of year 2 = $53,142.86

book value end of year 3 = $49,714.29

book value end of year 4 = $46,285.72

book value end of year 5 = $42,857.15

double declining balance:

deprecation expense year 1 = 2 x 1/14 x $60,000 = $8,571.43

book value end of year 1 = $51,428.57

deprecation expense year 2 = 2 x 1/14 x $51,428.57 = $7,346.94

book value end of year 2 = $44,081.63

deprecation expense year 3 = 2 x 1/14 x $44,081.63 = $6,297.38

book value end of year 3 = $37,784.25

deprecation expense year 4 = 2 x 1/14 x $37,784.25 = $5,397.75

book value end of year 4 = $32,386.50

deprecation expense year 5 = 2 x 1/14 x $32,386.50 = $4,626.64

book value end of year 5 = $27,759.86

sum of digits:

depreciable value = $60,000 - $12,000 = $48,000

total sum of digits = 120 years

deprecation expense year 1 = $48,000 x 15/120 = $6,000

book value end of year 1 = $54,000

deprecation expense year 2 = $48,000 x 14/120 = $5,600

book value end of year 2 = $48,400

deprecation expense year 3 = $48,000 x 13/120 = $5,200

book value end of year 3 = $43,200

deprecation expense year 4 = $48,000 x 12/120 = $4,800

book value end of year 4 = $38,400

deprecation expense year 5 = $48,000 x 11/120 = $4,400

book value end of year 5 = $34,000