1.2. Depreciation Calculation for the Second Year

Try these first

1. 1.

   What formula is used to calculate the depreciation for the second year using the sum of the years' digit method?

   Hint

   Think about the components that go into the formula.

2. 2.

   Define salvage value in the context of depreciation.

   Hint

   What happens to an asset when it is no longer used?

3. 3.

   What is the formula for calculating second-year depreciation using the sum of the years' digit method?

   • (8/45) * (cost - salvage)
   • (2/n) * book value
   • (8/n) * (cost - salvage)

   Hint

   Recall the specific factors involved in the years' digit method.

4. 4.

   True or False: The double declining balance method effectively uses salvage value in its depreciation calculations.

   • True
   • False

   Hint

   Think about why businesses want to use this method.

5. 5.

   A tractor is purchased for ₹10,00,000 with a salvage value of ₹1,00,000 and has a useful life of 10 years. If the depreciation method is changed from double declining to sum of the years' digits after the third year, how should future depreciations be calculated to ensure the book value meets the salvage value at the end?

   Hint

   Realize that you’ll need to assess the remaining useful life properly.

6. 6.

   Create a financial scenario in which a company switches from straight-line to double declining balance in mid-life of an asset. Justify your reasons and compute the expected tax impact.

   Hint

   Evaluate your tax estimates carefully.