I'm doing a problem where computer equipment is purchased for $154,000, with a salvage value of $25,000 after 4 years of use. I'm supposed to find the depreciation by using the double-depreciation method, but every way I try to figure it, the value is less than the salvage value in the 3rd year. Is it normal for this to happen, or am I doing something wrong?

morgaine300

Yes, it's normal. It won't necessarily happen that way, but it's certainly "normal" if it does. Especially for something depreciated over a short time. The time period and salvage values will make a difference in how this comes out.

The difference between this and something like straight-line is that you are not taking the depreciable amount and just dividing it up evenly. So it doesn't come out evenly. The salvage is not part of your calculation to do the depreciation, so there's nothing to stop it from going under. (If I changed salvage to $40,000, it would happen in the 2nd year!)

There's an adjustment that needs to be made to take care of it. You obviously already realize you aren't allowed to take it below salvage value. So what you need to do is look at where the book value is after year 2, and how much would be left that could be depreciated to hit salvage. And then adjust your depreciation to that.

For instance, if book value at the end of year 2 is $35,000, then you have $10,000 left to depreciation to hit salvage. (35K - 25K) So you'd just make your depreciation $10,000 regardless of what you've already figured out. And then you stop... no fourth year.