Sum-of-Years-Digits Depreciation
Lesson:
If you liked double-declining balance depreciation, you'll probably like its bigger brother even more.
In most cases it will depreciate even faster.then double-declining balance depreciation.
Here's how it works:
- Calculate the depreciable base: Take the initial item value and subtract its residual value
- Count the number of years of total depreciation. Add those numbers together. For instance, 5 years of depreciation would be 5+4+3+2+1=15.
- Starting with the first year, assign each the highest available number available from those listed above. For instance, the first year would be 5/15, the next would be 4/15 and so on.
- For each year, multiply the remaining depreciable base by the fraction above.
Neptune ltd., the upstart dumbell exporter, is examining some equipment that has been depreciated using the sum-of-years method.
You've been briefed with the following facts:
- It was acquired for $76,000.
- It will last for 5 years.
- It has no residual value.
What is the depreciation in year 5 when using the sum-of-years depreciation method?
Answer:
- The depreciation in year 5 is $5,066.67
Explanation:
- The first thing we need to do is figure out the sum of all of the years.
1 + 2 + 3 + 4 + 5 = 15 - The math is a little complicated, so let's build a table. The fractional depreciation rate is calculated by taking the largest year number we haven't used yet and dividing it by the sum of all of the years (15).
sum-of-years method Year Depreciation Base Fractional Depreciation Rate Depreciation Accumulated Depreciation Ending Value - Now let's fill in another year.
sum-of-years method Year Depreciation Base Fractional Depreciation Rate Depreciation Accumulated Depreciation Ending Value 1 $76,000.00 5 / 15 $25,333.33 $25,333.33 $50,666.00 - Now let's fill in another year.
sum-of-years method Year Depreciation Base Fractional Depreciation Rate Depreciation Accumulated Depreciation Ending Value 1 $76,000.00 5 / 15 $25,333.33 $25,333.33 $50,666.00 2 $76,000.00 4 / 15 $20,266.67 $45,600.00 $30,400.00 - Now let's fill in another year.
sum-of-years method Year Depreciation Base Fractional Depreciation Rate Depreciation Accumulated Depreciation Ending Value 1 $76,000.00 5 / 15 $25,333.33 $25,333.33 $50,666.00 2 $76,000.00 4 / 15 $20,266.67 $45,600.00 $30,400.00 3 $76,000.00 3 / 15 $15,200.00 $60,800.00 $15,200.00 - Now let's fill in another year.
sum-of-years method Year Depreciation Base Fractional Depreciation Rate Depreciation Accumulated Depreciation Ending Value 1 $76,000.00 5 / 15 $25,333.33 $25,333.33 $50,666.00 2 $76,000.00 4 / 15 $20,266.67 $45,600.00 $30,400.00 3 $76,000.00 3 / 15 $15,200.00 $60,800.00 $15,200.00 4 $76,000.00 2 / 15 $10,133.33 $70,933.33 $5,066.00 - Now let's fill in another year.
sum-of-years method Year Depreciation Base Fractional Depreciation Rate Depreciation Accumulated Depreciation Ending Value 1 $76,000.00 5 / 15 $25,333.33 $25,333.33 $50,666.00 2 $76,000.00 4 / 15 $20,266.67 $45,600.00 $30,400.00 3 $76,000.00 3 / 15 $15,200.00 $60,800.00 $15,200.00 4 $76,000.00 2 / 15 $10,133.33 $70,933.33 $5,066.00 5 $76,000.00 1 / 15 $5,066.67 $76,000.00 $0.00 - And here we can just read off the depreciation for year 5 from the table ($5,066.67).
sum-of-years method Year Depreciation Base Fractional Depreciation Rate Depreciation Accumulated Depreciation Ending Value 1 $76,000.00 5 / 15 $25,333.33 $25,333.33 $50,666.00 2 $76,000.00 4 / 15 $20,266.67 $45,600.00 $30,400.00 3 $76,000.00 3 / 15 $15,200.00 $60,800.00 $15,200.00 4 $76,000.00 2 / 15 $10,133.33 $70,933.33 $5,066.00 5 $76,000.00 1 / 15 $5,066.67 $76,000.00 $0.00