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.
Ultra Biz, the beloved desk manufacturer, is examining some equipment that has been depreciated using the sum-of-years method.
You've been briefed with the following facts:
- It will last for 3 years.
- It had an original purchase price of $74,300.
- Its residual value is $1,525.
What is the total accumulated depreciation as of end of year number 2 when using the sum-of-years depreciation method?
Answer:
- The total accumulated depreciation as of end of year number 2 is $60,645.83
Explanation:
- The first thing we need to do is figure out the sum of all of the years.
1 + 2 + 3 = 6 - 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 (6).
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 $72,775.00 3 / 6 $36,387.50 $36,387.50 $37,912.00 - Now let's fill in another year.
sum-of-years method Year Depreciation Base Fractional Depreciation Rate Depreciation Accumulated Depreciation Ending Value 1 $72,775.00 3 / 6 $36,387.50 $36,387.50 $37,912.00 2 $72,775.00 2 / 6 $24,258.33 $60,645.83 $13,654.00 - And here we can just read off the accumulated depreciation for year 2 from the table ($60,645.83).
sum-of-years method Year Depreciation Base Fractional Depreciation Rate Depreciation Accumulated Depreciation Ending Value 1 $72,775.00 3 / 6 $36,387.50 $36,387.50 $37,912.00 2 $72,775.00 2 / 6 $24,258.33 $60,645.83 $13,654.00