A new electric saw for cutting small pieces of lumber in a furniture manufacturi

Question

A new electric saw for cutting small pieces of lumber in a furniture manufacturing plant has a cost basis of $4,600 and a 10 year depreciable life. The estimated SV of the saw is $600 at the end of 10-year period. Determine the annual depreciation amounts using the straight-line method. Tabulate the annual depreciation amounts and the book value of the saw at the end of each year.

Rework above problem with the DB method when (a) R = 2/N (200% DB method) and (b) R = 1.5/N (150% DB Method), and (c) R 2/N then switch to SL. Tabulate the annual depreciation amount and book value for each year.  

R 1.5/N dy R= 2N R- 2/N, switch to SL di di BVn BVn 0 4 10

Explanation / Answer

As per straight-line method

Depreciation = (Cost of Asset - Salvage Value) / useful life

Cost of electric saw = $4,600

Salvage Value = $600

Useful life = 10 years

Annual Depreciation = (4600-600) / 10

= 400

Rate of depreciation = (400 / 4600)* 100

= 8.7%

Using DB method, rate of depreciation

a) R= 2 / N (200% DB method)

= 8.7 * 200%

= 17.4%

b) R= 1.5 / N (150% DB method)

= 8.7*150% = 13.05%

c) Assuming the switch in method from DB to SLM in year 7

R= 2/ N (200% DB method)  

= 8.7*200% = 17.4%

Switching to SLM in year 7

= (book value at the end of year 6 - Salvage Value) / remaining life

= (1460.96 - 600) / 4

= 215.24

EOY, n dj BVn 0 0 4,600 1 400 4,200 2 400 3,800 3 400 3,400 4 400 3,000 5 400 2,600 6 400 2,200 7 400 1,800 8 400 1,400 9 400 1,000 10 400 600

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