state-of-the-art MRI machine to be purchased on 01-01-09 for a cost of $1,250,000 with a useful life of 6 years and an expected salvage value of $35,000.
I need to calculate depreciation for the entire 6 year period using SL, SYD, DDB, and MARCS.
For SL and SYD, calculate and use the depreciable base to determine yearly depreciation expense.
For DDB, use the total asset cost to calculate yearly depreciation but do not let total depreciation be greater than the depreciable base.
My actual question now: Can anyone explain depreciation, my teacher is not helping anyone, tried it several times on my own, but not getting everything to equal out in the end
Thanks in advance
For SL and SYD, calculate and use the depreciable base to determine yearly depreciation expense.For DDB, use the total asset cost to calculate yearly depreciation but do not let total depreciation be greater than the depreciable base.Can anyone explain how to use the four methods, my book is no good, and my teacher is not answering any questions, i tried it several times,but im not getting it to equal in the end.
Thanks in advance
Depreciation is a method of allocating the cost of an asset over its useful life. It represents the gradual decrease in the value of the asset due to wear and tear, obsolescence, or other factors.
There are several methods for calculating depreciation, including the Straight-Line method (SL), Sum-of-the-Years'-Digits method (SYD), Double-Declining Balance method (DDB), and Modified Accelerated Cost Recovery System (MACRS) commonly known as MARCS.
1. Straight-Line Method (SL):
The Straight-Line method evenly allocates the cost of the asset over its useful life. To calculate the yearly depreciation expense, use the following formula:
Depreciation Expense = (Cost - Salvage Value) / Useful Life
In this case, the cost of the MRI machine is $1,250,000, the salvage value is $35,000, and the useful life is 6 years.
Depreciation Expense = ($1,250,000 - $35,000) / 6 = $202,500 per year.
2. Sum-of-the-Years'-Digits Method (SYD):
The Sum-of-the-Years'-Digits method allocates a higher portion of the cost during the early years and a lower portion during the later years. To calculate the yearly depreciation expense, use the following formula:
Depreciation Expense = (Remaining Life / Sum of the Years) * (Cost - Salvage Value)
First, calculate the sum of the years: Sum of the Years = n * (n + 1) / 2
In this case, n (useful life) is 6, so the sum of the years is 6 * (6 + 1) / 2 = 21.
For each year, calculate the depreciation expense:
Year 1: (6 / 21) * ($1,250,000 - $35,000) = $187,500
Year 2: (5 / 21) * ($1,250,000 - $35,000) = $178,571
Year 3: (4 / 21) * ($1,250,000 - $35,000) = $169,643
Year 4: (3 / 21) * ($1,250,000 - $35,000) = $160,714
Year 5: (2 / 21) * ($1,250,000 - $35,000) = $151,786
Year 6: (1 / 21) * ($1,250,000 - $35,000) = $142,857
3. Double-Declining Balance Method (DDB):
The Double-Declining Balance method expedites the depreciation by applying a constant rate to the asset's declining book value. To calculate the yearly depreciation expense, use the following formula:
Depreciation Expense = Book Value * (2 / Useful Life)
For each year:
Year 1: $1,250,000 * 2 / 6 = $416,667
Year 2: ($1,250,000 - $416,667) * 2 / 6 = $277,778
Year 3: ($833,333 - $277,778) * 2 / 6 = $185,185
Year 4: ($555,556 - $185,185) * 2 / 6 = $123,457
Year 5: ($370,371 - $123,457) * 2 / 6 = $82,305
Year 6: ($246,914 - $82,305) * 2 / 6 = $54,870 (limited by the depreciable base).
4. Modified Accelerated Cost Recovery System (MARCS) - Optional for tax purposes:
MARCS is a tax-based depreciation system that allows you to claim deductions over a shorter period, resulting in higher deductions in the early years. The calculation is complex and depends on the type of asset and tax regulations. To calculate MARCS depreciation, consult tax guidelines or use specialized software.
Remember that different methods may result in slightly different depreciation expenses each year, but the total accumulated depreciation should be the same over the asset's useful life.
I hope this explanation helps clarify depreciation for you. If you have any further questions, feel free to ask!