CPA

Accelerated Depreciation Methods

Exam Results
Question #1 (AICPA.090635FAR-II-D)
Carr, Inc. purchased equipment for $100,000 on January 1, 2002. The equipment had an
estimated 10-year useful life and a $15,000 salvage value. Carr uses the 200% declining-
balance depreciation method. In its 2003 Income Statement, what amount should Carr report as
depreciation expense for the equipment?

A. $13,600
B. $16,000
The 200% declining balance depreciation method is also called the double declining balance
method or DDB. Because this is a declining balance method, the book value at the beginning of
2003 must be computed, and that is affected by depreciation in 2002. For 2002, depreciation
under DDB is 2/10 x $100,000 or $20,000. Note that salvage value is not subtracted when
computing depreciation because the "declining balance" is book value. For 2003, depreciation is
2/10 x ($100,000-$20,000) = $16,000 because the book value at the beginning of 2003 is
reduced by 2002 depreciation.

C. $17,000
D. $20,000
Question #2 (AICPA.990507FAR-FA)
Spiro Corp. uses the sum-of-the-years' digits method to depreciate equipment purchased in
January 2003 for $20,000. The estimated salvage value of the equipment is $2,000, and the
estimated useful life is four years.
What should Spiro report as the asset's carrying amount as of December 31, 2005?

A. $1,800
B. $2,000
C. $3,800
The carrying amount (book value) of a depreciable asset is its original cost less accumulated
depreciation. Under sum-of-the-years' digits method of calculating depreciation expense (and,
therefore, accumulated depreciation), the net depreciable cost (original cost less estimated
salvage value) is multiplied by a factor consisting of:
Numerator = the number of years the current year is from the end of the life of the asset

Denominator = the sum of numbers (digits) for each year in the life of the asset

For Spiro, the net depreciable cost is $20,000-$2,000 = $18,000. Since the equipment has an
estimated useful life of four years, the sum of the digits for each year would be 1 + 2 + 3 + 4 =
10, the denominator for calculating each year's depreciation. Depreciation for the four years
would be:

Year Depreciable cost Factor Annual depreciation Accumulated depreciation

Carrying value
2003 $18,000 x 4/10 = $7,200 $ 7,200 $20,000 - 7,200 =
$12,800
2004 18,000 x 3/10 = 5,400 12,600 20,000- 12,600 = 7,400
2005 18,000 x 2/10 = 3,600 16,200 20,000 - 16,200 = 3,800
2006 18,000 x 1/10 = 1,800 18,000 20,000 - 18,000 = 2,000
Total 18,000 x 10/10 = 18,000 18,000 2,000

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Accelerated Depreciation Methods
Thus, at the end of 2005 the carrying amount is $3,800, which also can be calculated as
salvage value 2,000 + (1/10 x $18,000) = $2,000 + $1,800 = $3,800.

D. $4,500
Question #3 (AICPA.090634FAR-II-D)
Ajax Corp. has an effective tax rate of 30%. On January 1, 2000, Ajax purchased equipment for
$100,000. The equipment has a useful life of 10 years. What amount of current tax benefit will
Ajax realize during 2000 by using the 150% declining-balance method of depreciation for tax
purposes instead of the straight-line method?

A. $1,500
The two depreciation amounts for 2000, the first service year of the asset, are: SL, $10,000
($100,000/10); and 150% DB, $15,000 (1.5 x SL amount or 1.50/10 x $100,000). The difference,
$5,000 is the excess of the 150% DB deduction over the SL deduction. The tax benefit of the
$5,000 excess is $1,500 ($5,000 x .30). The firm will pay $1,500 less in taxes if it uses the
150% DB method compared with the SL method.

B. $3,000
C. $4,500
D. $5,000
Question #4 (AICPA.900520FAR-TH-FA)
A fixed asset with a five-year estimated useful life and no residual value is sold at the end of the
second year of its useful life.
How would using the sum-of-the-years'-digits method of depreciation, instead of the double
declining balance method of depreciation, affect a gain or loss on the sale of the fixed asset?

Gain Loss
Decrease Decrease
Decrease Increase
Under SYD, total depreciation through the first two years is [(5 + 4)/(1 + 2 + 3 + 4 + 5)]Cost =
(9/15)Cost.
Therefore, book value remaining is (6/15)Cost = .4Cost.
Depreciation, year one = (2/5)Cost = .4Cost
Depreciation, year two = (2/5)(Cost-Depreciation, year one)
= (2/5)[Cost-(2/5)Cost]
=.4[Cost-.4(Cost)]
= .4(.6Cost) = .24 Cost

Total depreciation for the two years is therefore .4(Cost) + .24(Cost) = .64(Cost). Book value
remaining is (1-.64)Cost = .36 Cost.
The asset has a larger book value under SYD after two years. For a given amount of proceeds
on disposal, the larger book value under SYD causes any gain on disposal to be smaller than
under DDB and any loss greater than under DDB. In other words, the gain decreases and the
loss increases, relative to DDB.
Increase Decrease
Increase Increase
Question #5 (AICPA.930527FAR-TH-FA)

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Accelerated Depreciation Methods
On January 1, 1998, Crater, Inc. purchased equipment having an estimated salvage value equal
to 20% of its original cost at the end of a 10-year life. The equipment was sold December 31,
2002, for 50% of its original cost.
If the equipment's disposition resulted in a reported loss, which of the following depreciation
methods did Crater use?

A. Double declining balance.

B. Sum-of-the-years'-digits.
C. Straight-line.
The asset was sold when 1/2 of its useful life was expired. (The asset was used 5 years and
had an original useful life of 10 years.) If an asset is sold at a loss, then the book value at the
date of sale exceeds the proceeds from sale by the amount of the loss. Let C = original cost,
and BV = book value at date of sale.
Then BV-proceeds = loss Proceeds = .50C according to the question data.

Thus, BV-.50C = loss. Thus, BV must exceed 50% of the original cost because BV-.50C is a
positive number.

The only method from among those listed in the answer alternatives that leaves a BV greater
than 50% of original cost after 50% of the useful life has expired is the SL method. The book
value after the fifth year under SL is C-(C-.2C)(5/10) = .6C.

DDB's book value after five years is much less than 50% of original cost because it is an
accelerated method. The same holds for SYD. And under composite methods of depreciation,
individual assets do not have a separately recorded book value. When sold, accumulated
depreciation is debited for the difference between original cost and proceeds. No gain or loss is
recognized. Thus, the composite method could not apply in this question.

D. Composite.
Question #6 (AICPA.920550FAR-P1-FA)
South Co. purchased a machine that was installed and placed in service on January 1, 2004 at
a cost of $240,000. Salvage value was estimated at $40,000. The machine is being depreciated
over 10 years by the double declining balance method. For the year ended December 31, 2005,
what amount should South report as depreciation expense?
A. $48,000
B. $38,400
Depreciation in 2004 = $240,000(2/10) = $48,000
Depreciation in 2005 = ($240,000-$48,000)(2/10) = $38,400

The DDB method's rate is always twice the straight-line rate, or 2/useful life. The method does
not subtract salvage value when computing depreciation, but it also does not reduce book value
below salvage value. The depreciation in any year is the rate times the beginning net book
value of the asset.

C. $32,000
D. $21,600
Question #7 (AICPA.901113FAR-P2-FA)

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Accelerated Depreciation Methods
Vore Corp. bought equipment on January 2, 2004 for $200,000. This equipment had an
estimated useful life of five years and a salvage value of $20,000. Depreciation was computed
by the 150% declining balance method.
The accumulated depreciation balance at December 31, 2005 should be:

A. $102,000
Depreciation in 2004 = $200,000(1.50/5) = $ 60,000
Depreciation in 2005 = ($200,000-$60,000)(1.50/5) = 42,000
Accumulated depreciation balance at the end of 2005 $ 102,000
The declining balance class of depreciation method does not deduct salvage value when
computing depreciation although care must be taken not to depreciate the asset below salvage
value. Also, the rate of depreciation applied to book value is the percentage of the method
(150% in this case) divided by the useful life of the asset. Double declining balance, for
example, is 200%/n or 2/n where n = useful life.

B. $98,000
C. $91,800
D. $72,000
Question #8 (AICPA.08211232FAR-II.D)
A depreciable asset has an estimated 15% salvage value. Under which of the following
methods, properly applied, would the accumulated depreciation equal the original cost at the
end of the asset’s estimated useful life?
Straight-line Double-declining balance
Yes Yes
Yes No
No Yes
No No
Salvage value is the portion of the asset's cost not subject to depreciation. Total depreciation,
under any method, is limited to depreciable cost (cost less salvage value). The declining
balance methods do not subtract salvage when computing depreciation. Care must be taken to
avoid depreciating an asset beyond salvage value.
Question #9 (AICPA.900517FAR-P1-FA)
On April 1, 2004, Kew Co. purchased new machinery for $300,000. The machinery has an
estimated useful life of five years, and depreciation is computed by the sum-of-the-years'-digits
method.
The accumulated depreciation on this machinery at March 31, 2006 should be:

A. $192,000
B. $180,000
$180,000, the correct answer, equals $300,000[(5 + 4)/(5 + 4 + 3 + 2 + 1)].
Two full years of depreciation have been recorded, and the SYD method uses the number of
years left at the beginning of each year as the numerator of the fraction used in depreciation. At
the beginning of the first and second years, five and four years of the asset's life remained,
respectively. The denominator is the sum of the digits up to the asset's useful life (5).

C. $120,000
D. $100,000

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