Exercise IV – Solutions

Problem 1
A new piece of equipment is purchased at a total cost of US$16,000. Service life of the
equipment is 5 years and the salvage value at the end of the service life is expected to be
US$1,000. What is the depreciation in the fourth year of the service life if the straight-line
method is used?

Depreciation = (US$16,000 - US$1,000)/5 years = US$3,000/year

Depreciation in the fourth year of the service life is US$3,000.

Problem 2
A new piece of equipment is purchased at a total cost of US$30,000. The service life of the
equipment is 5 years and the salvage value at the end of the service life is expected to be zero.
What is the depreciation in the fourth year of the service life if the declining method is used?

Years of Rate applied Book value beginning Depreciation for Book value end
Service Life to balance of year (US$) this year (US$) of year (US$)
1 40% 30000 12000 18000
2 40% 18000 7200 10800
3 40% 10800 4320 6480
4 40% 6480 2592 3888
5 40% 3888 1555.2 2332.8
Total depreciation 27667.2
200% / 5
Problem 3
Assume an asset depreciates from an initial value P = U$20,000 to salvage value S = U$5,000
in 5 years. If the sum-of-years digits method is used, what is the depreciation in the fourth
year?

Sum-of-Years = 1 + 2+ 3 + … + N
SoY = 1+2+3+4+5 = 15
Depreciable value = P – S = $15,000

Year Depreciation Year-end Value

1 15,000/(5/15) = US$5,000 US$15,000
2 15,000/(4/15) = US$4,000 US$11,000
3 15,000/(3/15) = US$3,000 US$8,000
4 15,000/(2/15) = US$2,000 US$6,000
5 15,000/(1/15) = US$1,000 US$5,000

1
Problem 4
A company purchased a piece of equipment for US$110,000. It is estimated that this
equipment has a service life of 10 years and a salvage value of US$10,000 at the end of the
service life. It is estimated that this equipment will be on average used for 2,000 hours per
year over the 10-year service period. If the production method is used, what is the
depreciation of this equipment in a year if it is used for 3,000 hours in that year?

Depreciation/hour
= (US$110,000 – US$10,000)/(10 years × 2,000 hours/year)
= US$5/hour

In the third, equipment is used for 3,000 hours. Therefore,

Depreciation in this year = 3,000 hours × US$5/hour = US$15,000

Problem 5
A company purchased a piece of equipment for US$110,000, which is classified as “7
year-class” asset. It its salvage value is US$10,000 at the end of the service life. What is the
depreciation of this equipment in the seventh year if the accelerated cost recovery system is
used?

Depreciation in the seventh year = 8.93% × (US$110,000 – US$10,000) = US$8,930