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4.4 Depreciation

4.4 Depreciation
  • Math Help

    You have already seen that the annual depreciation in the straight-line method is the same each year. While relatively easy to calculate, straight-line depreciation is not really very representative of the way most items depreciate. Typically, depreciation is greatest in early years and levels off in later years. For instance, new cars usually depreciate more in the first year than in the second, more in the second than in the third, and so on. This feature of depreciation is built into double declining-balance depreciation, as shown in Example 3. Note in the spreadsheet and bar graph in Example 3 how the value depreciates the greatest in the first few years and levels off for the last few years.

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  • Checkpoint Solution

    Find the annual rate of depreciation.

    A spreadsheet showing the depreciation schedule is shown below.

    data folder

    Note that depreciation in the sixth and seventh years is adjusted so that the equipment depreciates to its salvage value, $4000.

    You can check your work using a depreciation schedule calculator located in Tools.

  • Comments (1)

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    system user
    Guest   1 decade ago |
    As long as your depreciation method is "rational and reasonable", the IRS allows you to create many different types of depreciation schedules. For instance, in the formula on page 186, you could substitute 1.5 for 2. This would be called a "150% Declining Balances Method".