CFA CFA Level 1 Depreciation Question

Depreciation Question

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    • PrestigeWorldWide
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      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

      Answer: A

      Depreciation expense (first year) = 2/6 × (75,000) = $25,000

      Depreciation expense (second year) = 2/6 × (75,000 − 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
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      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?

      Supernova’s depreciation expense for 2009 under the straight line method is closest to:

      1. $101,875

      2. $109,375

      3. $81,500

      Answer: A

      Depreciation expense = (Cost – Residual Value) / Useful life

      Depreciation expense = (875,000 – 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.

    • CFAI_wont_stop_me
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      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.

    • PrestigeWorldWide
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      Thanks, I appreciate the clarification

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