CFA CFA Level 1 Depreciation Question

# Depreciation Question

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• 2

Can anyone help clarify for me why the residual value of \$5,000 (what I assume to be the equivalent of salvage value) is not subtracted from \$75,000? This seems to go against everything I though I knew about depreciation. Thank you

XYZ Company recently purchased a machine for \$75,000. It expects to use the machine for 6 years, after which it will have a residual value of \$5,000. How much depreciation should the company charge in the second year using double-declining balance depreciation?

1. \$16,667

2. \$15,556

3. \$25,000

Depreciation expense (first year) = 2/6 Ã— (75,000) = \$25,000

Depreciation expense (second year) = 2/6 Ã— (75,000 âˆ’ 25,000) = \$16,667

(Wiley 25-16)

Wiley. Practice Questions for 2015 Level I CFA Exam. John Wiley & Sons P&T, 2014-08-27. VitalBook file.

• PrestigeWorldWide
Participant
• CFA Level 1
4

Thanks, I appreciate the clarification

• 2

Further in the text, the below question is asked. Am I missing something? Does the double decline balance method not account for an asset’s salvage value?

Supernovaâ€™s depreciation expense for 2009 under the straight line method is closest to:

1. \$101,875

2. \$109,375

3. \$81,500

Depreciation expense = (Cost â€“ Residual Value) / Useful life

Depreciation expense = (875,000 â€“ 60,000) / 8 = \$101,875

(Wiley 25-26)

Wiley. Practice Questions for 2015 Level I CFA Exam. John Wiley & Sons P&T, 2014-08-27. VitalBook file.

• 1

u dont use residual value in calcualtions of accelerated methods of amortisation. The rule is just that the value of an asset cant go below residual value in later years.