CE40-2 / E01

CONSUEGRA, Eliza Gail Roque November 6, 2020

2018102337 CE-2

M3-CPR
M3-Class Produced Reviewer

a. Straight Line Method

A company bought a machine for $80,000. They have estimated the useful life of the
machine to be 12 years with a salvage value of $17,000. Determine the annual straight-
line depreciation and the book value at the beginning of the 9th year.
Year BVB Dn BVE
1 80,000 5,250 74,750
2 74,750 10,500 69,500
3 69,500 15,750 64,250
4 64,250 21,000 59,000
5 59,000 26,250 53,750
6 53,750 31,500 48,500
7 48,500 36,750 43,250
8 43,250 42,000 38,000
9 38,000 47,250 32,750
10 32,750 52,500 27,500
11 27,500 57,750 22,500
12 22,500 63,000 17,000

GIVEN:
 CO = $80,000
CL = $17,000
L = 12 years

SOLUTION:
80000 - 17000
d = = 5250
12

[beginning of 9th year = end of 8th year]

8(80000 - 17000)
D6 = = 420 00
12

C6 = 80000 - 420 00 = 380 00

ANSWER:
The annual straight-line depreciation is $5,250 and the book value at the beginning of the 7th year is
$48,500.

b. Sinking Fund Method

SVT Limited Co. invested on a business with a total of $1,450,000 wherein the company
want to set up a sinking fund with a salvage value of 20% of the original cost of the
investment. Make a schedule for the periodic contribution if the annualized rate of
interest is 6.5% for an expected life of 10 years of the product. Determine the book value
at the end of 3 years by sinking fund method.

Year BVB Dn BVE

1 1,450,000 85,961.44 1,364,038.56
2 1,364,038.56 177,510.37 1,272,489.63
3 1,272,489.63 275,009.99 1,174,990.01
4 1,174,990.01 378,847.08 1,071,152.92
5 1,071,152.92 489,433.58 960,566.42
6 960,566.42 607,208.20 842,791.80
7 842,791.80 732,638.18 717,361.82
8 717,361.82 866,221.10 583,778.90
9 583,778.90 1,008,486.91 441,513.09
10 441,513.09 1,160,000.00 290,000.00

GIVEN:
CO = $1,450,000
 CL = $1,450,000 × 20% = $290,000
L = 10 years

SOLUTION:
1450000 - 290000
d= = 116000
10

1.0653 - 1
D3 = 116000(F/A,6.5%,3) = 116000
0.065 [ ]
= 275009.99

C3 = 1450000 - 275009.99 = 1174990.01

ANSWER:
The book value of the business at the end of the 3rd year is $1,174,990.01.

c. Matheson’s Formula

1. An equipment bought at a price of P750,000 has an economic life of 4 years and a

salvage value of P25,000. Compute the second-year depreciation using Declining
Balance Method with a money cost of 8% per year.

n BVB d Dn BVE
1 750,000 60,000 60,000 690,000
2 690,000 55,200 115,200 634,800
3 634,800 50,784 165,984 584,016
4 584,016 46,721.28 212,705.28 537,294.72

GIVEN:
CO = P750,000
L = 4 years
CL = P25,000

SOLUTION:
K = 8% = 0.08
d2 = (0.08)(750000)(1 - 0.08 )2-1 = 55200
ANSWER:
The second-year depreciation is P55,200.

2. An equipment bought at a price of P500,000 has an economic life of 6 years and a

salvage value of P23,000. Compute the fourth-year depreciation using Declining
Balance Method.
 n BVB d Dn BVE
1 500,000 200,707.17 200.707.17 299292.83
2 299,292.83 120,140.43 320,847.61 179,152.39
3 179,152.39 71,914.34 392,761.95 107,238.05
4 107,238.05 43,046.89 435,808.84 64,191.16
5 64,191.16 25,767.25 461,576.09 38,423.91
6 38,423.91 15,423.91 477,000 23,000

GIVEN:
CO = P500,000
L = 6 years
CL = P23,000

SOLUTION:
23000
K=1−
√
6

500000
=0.40141

d 4 = (0.40141)(500000)(1 - 0.40141) 4-1 = 43046.89

ANSWER:
The fourth-year depreciation is P43,036.89

d. Double Declining Balance Method

An equipment bought at a price of P500,000 has an economic life of 6 years and a

salvage value of P23,000. Compute the third-year depreciation using Double Declining
Balance Method.

n BVB d Dn BVE
1 500,000 166,666.67 166,666.67 333,333.33
2 333,333.33 111,111.11 277,777.78 222,222.22
3 222,222.22 74,074.07 351,851.85 148,148.15
4 148,148.15 49,382.72 401,234.57 98,765.43
5 98,765.43 32,921.81 434,156.38 65,843.62
6 65,843.62 21,947.87 456,104.25 43,895.75

GIVEN:
CO = P500,000
L = 6 years
CL = P23,000

SOLUTION:
 2
K= = 0.33
6

d 3 = (0.33)(500000)(1 - 0.33 )3-1 = 74074.07

ANSWER:
The third-year depreciation is P74,074.07

e. Sum of the Years Digit Method

The Magic Shop availed a machine that costs $40,000 which has a salvage value of
$1,000 at the end of its economic life of 3 years. Using the Sum of the Years Digit
Method, determine the book value at the end of each year of life.

n BVB d Dn BVE
1 40,000 19,500 19,500 20,500
2 20,500 13,000 32,500 7,500
3 7,500 6,500 39,000 1,000