- CFA Exams
- CFA Exam: Level I 2021
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 26. Long-lived Assets
- Subject 3. Depreciation Methods

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**CFA Practice Question**

An asset having a four-year service life and a salvage value of $5,000 was acquired for $45,000 cash on January 2. What will be the depreciation expense for the second year (ending December 31)?

B. $11,250, using the double-declining-balance method

C. $14,000, using the units-of-output method

A. $11,250, using the straight-line method

B. $11,250, using the double-declining-balance method

C. $14,000, using the units-of-output method

Correct Answer: B

Under declining-balance, salvage value is ignored in the calculation. Depreciation for year one would be $22,500 (45,000 X 50%) and year two would be $11,250 (($45,000 - $22,500) X 50%).

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**User Contributed Comments**
10

User |
Comment |
---|---|

kalps |
Personal information: 1) The salvage value does not form part of the calculation, it jut prohibits the depreciation amount from being such that the NBV falls below the salvage value 2) annual depn amount is the same fractiuon calculated as N/2 (cost-accumulated depn) |

AdriGul |
KALPS: It's 2/N, not N/2. |

RichWang |
On BA II Pro 2nd DEPR 2nd SET, 2nd SET -> DB=200 Down Arrow, LIF = 4 Down Arrow, M01 =1 (starting from first month) Down Arrow, CST = 45,000 Down Arrow, SAL = 5,000 Down Arrow, YR = 2 Down Arrow, DEP = 11,250 |

vadimmuchnik |
thanks, RichWang! |

SaeedAlam |
45,000 x (2/4)^2 |

dybacis |
thanks RichWang! |

johntan1979 |
RichWang's method will take at least 1 minute, with the guarantee that you pressed the correct buttons, of course. Meanwhile, SaeedAlam's method takes less than 30 seconds, no manual errors. Better still, do it mentally. It's not a difficult task. Just remember the formula is (cost - accumulated depreciation)x 2/n Where accumulated is 0 in the first year and n is the useful life |

jonan203 |
HP12C 45,000 <enter><enter> 2 <enter> 4 <divide><times><minus> .50 <times> total calculation time = 5 seconds |

ybavly |
thanks Rich Wang! truth is, you can eliminate A and C in 30 seconds A - is easy 10k/yr so cant be right C - no output info give. so B. |

khalifa92 |
double decline method 2/estimated life = depreciation % here it is 2/4= 0.5 thus reducing 50% of BV each year |