WEBVTT
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Welcome to the course depreciation alternate
investment and profitability analysis We are
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continuing with module one that is depreciation
In this lecture we will cover another depreciation
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method which is called double declining-balance
method and this is fourth lecture in the series
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Welcome to the course depreciation alternate
investment and profitability analysis we are
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continuing with module one that is depreciation
In this lecture I will cover another depreciation
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method which is called double declining-balance
method This is fourth number of lecture in
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the series
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The double declining balance method is an
accelerated form of depreciation methods under
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which the majority of the depreciation associated
with a fixed asset is recovered during the
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first few years of its useful life The approach
is reasonably under either of the following
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circumstances that means we we should accept
or we should use this double declining method
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approach under following circumstances
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When the utility of an asset is being consumed
at a more rapid rate during the early part
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of its useful life or when the intent is to
recover more expense now thereby shifting
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profit recognition further into the future
which may be used for deferring income taxes
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This I had also explained in the declining-balance
method that if I the depreciation is high
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in the early part of the useful life then
one has to pay less taxes and hence more money
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will be there in the firm to utilize However
this method is more difficult to calculate
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than the traditional straight line method
of depreciation
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Also most assets are utilized at a consistent
rate over the useful lives which does not
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reflect the rapid rate of depreciation resulting
from this method So with the usefulness is
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consistent rate that means at a consistent
rate we are using the equipment then probably
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double declining method of depreciation should
not be used But if the depreciation is fast
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in the early periods like I had given an example
of computer The computer usage is more in
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its early period than in the later period
and hence for computer type of equipment the
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double declining method is a better method
to be used than straight-line method
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Double declining-balance method A common depreciation-computation
method that involves applying the depreciation
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rate against the non-depreciated balance and
is generally used for long-lived assets The
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double declining-balance depreciation method
is an accelerated depreciation method that
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computes twice as much of the depreciation
based on assetâ€™s book value each year compare
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to straight-line depreciation method
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This method is sometimes called double declining-balance
or 200 percent method There are other methods
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also like this double declining-balance 150
percent methods also but generally double
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declining-balance method refers to about 200
percent method In fact it is a declining-balance
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method using a fixed percentage factor giving
a depreciation rate equivalent to twice the
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minimum rate with the straight-line method
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The formula for double declining-balance method
if we check then it is very clearly shown
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in the slide Declining-balance (the depre)
depreciation is calculated using the formula
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Depreciation is equal to depreciation rate
into book value of the asset However in the
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double declining-balance method it is depreciation
is equal to a accelerator factor into straight-line
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rate
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Depreciation for a period in a double declining-balance
method is equal to 2 into straight-line depreciation
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percentage into book value at the beginning
of the period The value of the accelerator
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factor is 2 for double declining-balance method
The value of the accelerator factor is 1.5
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or hundred fifty percent In a hundred fifty
percent declining-balance method if the accelerator
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factor is 2 this is 200 percent declining-balance
method if it is 150 percent it is the hundred
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fifty percent decline-balance method
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It should be noted that the double declining-balance
method is often applied to cases where the
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salvage value is considered to be zero If
salvage value is zero then the formula shortens
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because if the salvage value is zero then
in a straight-line depreciation method the
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depreciation is equal to 1 by the service
life of equipment And hence if it is taken
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as 1 by service life of the equipment then
for double declining-balance method this becomes
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2 divided by service life of the equipment
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So it simplifies and only knowing the service
life of the equipment we can compute the percentage
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for the double declining-balance method Let
us take an example to compute double declining-balance
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method Now the example is if a business if
a business purchased a vehicle for RS 5 lakh
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and expect it to last for 10 years and after
which its salvage value is expected to be
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Rupees 50000 the company would deduct the
remaining 4 lakh 50000 as 45000 per year for
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10 years under straight-line depreciation
method Find the depreciation for first two
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years using double declining-balance method
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Let us solve it on the board Now this is the
example to demonstrate the double declining-balance
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method So what is given V equal to 5 lakh
Vs is equal to 50000 N is equal to 10 Now
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if I try to calculate what will be the depreciation
using straight-line method so depreciation
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using straight-line method
This is equal to Rupees 5 lakh minus Rupees
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50000 divided by 10 which comes out to be
Rupees 450000 divided by 10 is equal to RS
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45000 This is my depreciation rate using straight-line
method
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Now hence fixed percentage factor f
using straight-line method is equal to 45000
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divided by 500000 this comes out to be 0.09
or 9 percent Now DDBM double declining-balance
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method uses 2 times
the f value calculated using straight-line
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method So f for straight-line method is equal
to 0.09 and hence f for DDBM method will be
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2 into 0.09 that is 0.18 or 18 percent
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Now the book value
using DDBM after 1 year that is a equal to
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1 Va is equal to V minus Vf is equal to V
1 minus f is equal to 5 lakh into 1 minus
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0.18 is equal to Rupees 410000 Hence depreciation
for the first year using DDBM equal to 5 lakh
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minus four lakh ten thousand is equal to Rupees
90000 Now this can be directly computed Depreciation
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for first year is equal to 0.18 into 5 00000
is equal to Rupees 90000 So again we can calculate
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is in this manner or we can directly calculate
the depreciation for the first year as this
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Now similarly depreciation for the second
year Now book value
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using DDBM after second year a equal to 2
Va equal to 1 minus f whole square equal to
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5 lakh 1 minus 0.18 whole square this comes
out to be 0.6724 Rupees 336200 Hence depreciation
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for second year is equal to Rupees 410000
minus Rupees 36200 equal to Rupees 73800 Now
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this (four thousand) 410000 is the book value
after the first year that we have calculated
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in the first step or directly you can go the
depreciation for second year is equal to 18
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percent of the book value that comes out to
be 0.18 into the (41) 410000 comes out to
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be 0.18 into 41000 this is 0.18 into 410000
that comes out to be Rupees 73800
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If in the time line we see this is zero the
cost is 500000 which is book value after one
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year this reduces to 410000 Rupees and after
2.0 this is 336200 So depreciation from the
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second year this will be computed based on
the fixed percentage 0.18 into this value
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Similarly for the third year this will be
a 0.18 into 336200 depreciation So this is
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the way how this will move
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Now let us take another example the earlier
example was basically given to demonstrate
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how to compute the depreciation using double
declining balance method Now this in this
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example one tells vinod purchased a i7 computer
paying Rupees 80000 The computerâ€™s estimated
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salvage value is Rupees 5000 after 5 years
of useful life Use double decline method to
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compute annual depreciation for all five years
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Now what is given to us original value of
computer is equal to Rupees 80000 salvage
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value of computer is equal to Rupees 5000
amount to be depreciated is equal to Rupees
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80000 minus 5000 equal to Rupees 75000 Useful
life N is equal to 5 years Now this is the
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parameters under which we have to compute
the depreciation Now the first step is to
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find out depreciation using straight-line
method
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So depreciation using straight-line method
is equal to Rupees 75000 divided by 5 which
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comes out to be Rupees 15000 per year Now
you have to for find out the value of f f
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value that is fixed percentage value for straight
line method is equal to 15000 divided by the
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original cost that is 80000 which comes out
to be 0.1875 Now thus for double declining
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method Thus for DDBM the value of f will be
equal to 2 into 0.1875 comes out to be 0.375
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that is 37.5 percent
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Now the first year depreciation the first
year depreciation using DDBM method is equal
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to 80000 into 0.375 this comes out to be Rupees
30000 Now now second year depreciation will
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be recent book value into 0.375 this is a
factor Now recent book value is 80000 minus
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30000 because this is the depreciation of
the first year into 375 that comes out to
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be Rupees 18750 let us check it Now for third
year depreciation will be recent book value
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into 0.375 and in this case the recent book
value will be this will be book value at the
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end of the first year and start of the second
year Now the book value will be 50000 minus
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18750 into 375 which comes out to be 50000
minus 18750 comes out to be 31250 into 375
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into point 375 comes out to be Rupees 11718.8
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Now fourth year depreciation
will be recent book value into 0.375 So this
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is equal to 31250 minus 11719 let us write
it 719 into 0.375 this comes out to be Rupees
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7324 And for the fifth year for fifth year
the depreciation is equal to 19531 minus 7324
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into 0.375 this comes out to be 11207 into
0.375 which comes out to the Rupees 7207 Now
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at the end we are charging 7207 but if I multiply
this this comes out to this less this is 122
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So if I multiply 12207 into 0.375 this comes
out to the Rupees 4578 however I am charging
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this 7207
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From where this 720607 has come this has come
12207 minus the book book salvage value 5000
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comes out to be Rupees 7207 that means
this is Vs this V I was moving something like
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this above Vs So from here we have taken straight-line
This is fourth year to fifth year this is
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fifth year So for the fifth year I am deducting
7207 instead of 4578 to bring it to the DBVs
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value This table shows you the values
computed The depreciation computed for
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different years which I had already shown
you in the blackboard
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Now let us go to the example number two Now
the example number is two is a crude distillation
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laboratory unit was purchased by paying Rupees
2 lakh with a service life of 7 years The
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expected salvage value after the useful life
is estimated to be 20000 Determine the depreciation
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charges and year and book values using declining-balance
method
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This question is not much different than
the the example one So let us solve it So
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given are original cost cost of the equipment
was Rupees 2 lakh salvage value is Rupees
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20000 useful life N is equal to 7 years
Now obviously the first step for solving this
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will be to calculate the depreciation rate
using straight-line method and then it we
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have to convert it into a fraction f and then
for double declining-balance method will take
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two times this value and start computing the
depreciation charges
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So using straight-line depreciation
will be 2 00000 minus 20000 divided by 7 So
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this is nothing but 180000 divided by 7 this
comes out to be Rupees 25714.2857 per year
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So the fraction value of f using the straight-line
method is equal to 25714.2857 divided by this
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two lakh using a finding out the fraction
of the original cost comes out to be 0.1285714286
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Now thus f for DDBM BM is equal to 2 into
f for straight-line method is equal to 2 into
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0.1285714 comes out to the 0.25714286 is equal
to around 25.71 percentage
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So we have computed now the f for double declining-balance
method which comes out to be about 25.71 percent
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Now now depreciation for first year will be
this value 0.25714286 into Rupees 200000 that
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is the original cost of the equipment which
comes to
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be Rupees 51428.57
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Now the book value
at the end of first year or start of second
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year because this is the book value here this
is zero this is one this is two So this is
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the book value here at this point So I can
say that the end of the first year or the
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start of the second year is equal to RS 200000
minus this value which 51428.57 is equal to
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Rupees 148571.43 So this is the value 148571.43
this is at this point
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Now the depreciation for the second year will
be will be this book value multiplied by the
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factor This book value will come here that
is Rupees 148571.43 into this factor 0.25714286
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this comes out to the Rupees 38204.08 Now
the book value at the end of second year will
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be 148571.43 minus 38204.08 Now this way the
computations should be done Now let us see
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the results in a tabulated form
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Now this is the result in the tabulated form
and here we should observe that the depreciation
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is decreasing In the first year it is 51428
then it is 38000 and then it will further
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decrease That means in the early years the
depreciation will be far more than the later
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years In this also we will see that the depreciation
in the last year has to be computed based
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on the salvage value because here we also
find that from the starting to V it will not
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reach Vs it will reach something here
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So somewhere here we have to put a straight-line
method that it is sixth year this seventh
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year to reach to the Vs and that is why the
value of Vs will be different that I had already
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written at the end of this table that how
the Vs value will have to be calculated in
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the last year
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Now let us summarize the lecture The monetary
value of an asset decreases over time due
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to the use wear and tear or obsolescence this
is this decreases the measure of depreciation
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this we have already known about this And
in this lecture I have demonstrated how to
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use double declining-balance method for depreciation
computation and the main thing for of this
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double declining-balance method is that it
depreciates large value it gives large value
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of depreciation at the early years than the
later years And hence due to this high depreciation
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the profit in the early years will be less
and hence you have to pay less taxes in the
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early years Thank you