 expense for year one it also equals the depreciation expense for year two so those two added up would be the accumulated depreciation prior to the accumulated depreciation or the depreciation expense calculated in year three meaning we can also see it in this table as well it's the 193 125 so then we have that information and we're going to then subtract that out that gives us the book value prior to this so the book value prior to the current period is going to equal the cost less the accumulated depreciation prior to this period and once again it's the same number that we calculated up here but you just want to make sure that you have something set up where you're calculating this number out then we're going to multiply that times the double declining rate and the double declining rate is still this 50 percent so we're going to multiply it times 50 percent and so there we have this once again I could underline here we're going to multiply it times 50 percent so now we're looking at these two numbers here this and this and that will give us the depreciation for year three so I'm going to put my cursor here and do this calculation this equals the book value before this time period times the double declining rate gives us the depreciation for year three if we look at there our little worksheet up here then we are currently on work three uh year three depreciation is going to be what we just calculated but they could also ask what is the accumulated depreciation or the book value and in order to do that we're going to take the cost the cost will be the same so the cost will be equal to this 257.5 like so and that'll give us the 257.5 that does not change the accumulated depreciation would then be calculated as the prior year's accumulated depreciation plus the current year's depreciation expense or you can think of it as all three years so far in this case depreciation expense we add them up it comes out to 225.313 then how do we calculate the book value it equals the 257.5 less minus the 225.313 and that gives us our current book value if we look at that in context of a journal entry and our accounts remember we're on year three now we have our book value before this transaction all of our prior year year two has been closed out to year three equity account and therefore we're saying that we earned this another hundred thousand this year it's just the exact same of our earnings as the prior year and we have not yet recorded the depreciation and therefore if we do that then the depreciation in year three now they have to just we've calculated the number to be this 32188 so there we have the depreciation expense notice the decline in depreciation expense over the year that's why it's a front loaded method an accelerated method and that brings the net income from 100 minus the 32188 to the 63813 then we're going to credit the accumulated depreciation and that brings the cumulative depreciation the contra asset account the asset with a credit bounce up and the net income down for the 257.5 less to 225.313 to 32188 which is what is on our worksheet over here all right let's do this one more time now year four has a bit of a twist to it and this is often very very confusing to a lot of people and the problem is that the accumulated depreciation method is not perfect in its math it front loads the depreciation expense and whatever the final year is which happens to be year four in this case basically just needs to be plugged rather than us doing the calculation as we have done in the past so I'm going to do it the wrong way first to show you what we have done and the logical next step that you would think that we would do for year four so you can see the the imperfection in the math then do what we need to do in order to plug the number in terms of what we want it to be so you would think that the calculation in year four would be the book value I'm going to do this in a kind of short invest method it's going to be the book value from the prior year so it would be the cost less the accumulated depreciation given us the book value we've already calculated that though so I'm going to say that equals the book value up here the 3218188 and then we would multiply that times the double declining rate which we know is 50 percent and I'm going to make notice it came out to one because I haven't changed the cell to be in the terms of a percentage there's the 50 percent and if we multiply that then that would equal we would think the depreciation for year four so let's do that I'm going to say this equals the 32188 times the 50 percent and enter and then I'm going to plug that into our numbers up here and see what happens in terms of our worksheet we would think that the depreciation for year four then under this method should be the 1694 and if we calculate the book value then the cost is the same the accumulated depreciation equals the prior year accumulated depreciation plus the current year expense or if we highlight all four then we got the 241 416 the book value then is 257.5 less the accumulated depreciation and that gives us the 1694 now there's something wrong with this and I'll give you just a second to try to think about there's this what is wrong with that 16094 it's not as obvious as it might be if we had no salvage value but the but if we think about it the salvage value is is the problem here we remember that we said that we think we can scrap this piece of equipment for 20 000 and therefore we have we do not want to take the book value below the amount we believe we can get if we scrap it being 20 000 so what happened here is this depreciation took us to amount below the salvage value now this again it would be a lot more apparent if we didn't have a salvage value if we just thought that the equipment would be worth nothing at the end because this number would then be negative which makes absolutely no sense it doesn't make us any sense to say we have a fork left on the books which is worth negative 10 000 that doesn't make any sense all we're trying to do is allocate the cost if we say that the the floor is the salvage meaning we want to bring it down to the salvage then we have to stop at the 20 000 and this method because it's double declining is not perfect meaning the math just doesn't work perfectly and that's okay because it's just an estimate anyways and uh we don't need to be perfect it's just an estimate so we are going to just plug in the final year so it does kind of what we want it to do we just plug the final year so then we got to think about okay well i'm going to delete this and i'm going to go back down here i'm going to do it the way we have to do it any final year if it's a seven-year property it's going to be happening in basically year seven that we'll have to do this kind of plug calculation here's one way we can think of it we're going to start off with the cost again which is 257.5 and then i'm going to say less the salvage value and the salvage value remember from the problem was this 20 000 so this is where the salvage value comes into play 20 000 and now of course i've made it a percentage so i'm going to go back to the home tab the numbers group and i'm well actually i'll just go to this tab i'll format paint it and i'm going to turn it back into a number format and 20 000 be careful of the sales formatting of course anytime you work with these and that's going to be the amount to be depreciated so i'm going to take this calculation it's going to equal the 257.5 less minus the 20 000 and we get the 237.5 why are we doing this because basically if i want 20 000 left that's what we want to be left with then over the useful life of four years we will have to depreciate 237.5 why because the cost 257.5 less the 237.5 equals the 20 000 so over the useful life this is what we want to depreciate now if we subtract out the depreciation for all prior periods as of this point we had year one depreciation of 120 750 plus years two's 63 3475 plus year three 32188 that's the accumulated depreciation as of this time period once again we also calculated it in this format here meaning prior years accumulated depreciation plus the current year and that means that's what we've done so far so i'm going to put some underlines here we'll say this will be an underline here and then we're going to do the underline here and that will give us the the depreciation for year four that we need in order to leave us with the salvage of 20 000 hopefully and we'll so we'll double check that so this equals the uh what we want to depreciate over the useful life less what we've done so far prior to year four and that gives us the 12 i'm going to put an underline under here and we'll double that here and now let's go back up and see if this does what we want to do well what do we want to do leave us with a with a book value equal to the salvage of 12 20 000 all right so let's do that we're going to say in year four the depreciation we calculated to be now the 12 188 we know that if we calculate the book value then that's the cost less the accumulated depreciation cumulative depreciation is the prior years accumulated depreciation plus the current year's expense or just highlights all four years of depreciation if we add up the depreciation 237 5 then uh if we subtract this out the equals the cost less the accumulated depreciation is going to equal what's it going to equal hopefully 20 000 and it does so now we're left off with that 20 000 what's going to happen in year five absolutely nothing we're not going to depreciate anymore but what if we're still using the equipment still not going to depreciate it because we're not going to depreciate it below what we believe we can scrap it for and uh if it's if it's a significant amount we may have to adjust the estimate and say well the estimate was wrong and re-estim- adjust it what we will not do is depreciate it below the salvage generally or below zero of course uh we weren't we're not going to have a negative value of an equipment we'll now record the depreciation expense our normal journal entry is going to be down here so once again the depreciation expense for the current year is going to be this 12 188 and once we hit enter it'll record this amount here and it'll bring net income down like so and note the trend here note that what is happening to our depreciation expense it went it was way higher in year one it goes down in year two down in year three down in year four that's the idea of an accelerated method and note what that does to net income if all else is equal meaning if we say that we are only factors are going to be that we have the same revenue each year of 100 000 and the only factor being depreciation and look at that factor then we're going to say that that created actually a loss in year one it created income in year two and income increased in year three and an income increased in year four if we looked at the straight line method and we said that depreciation expense is the only factor then it resulted in a same net income over the time period and it's up to you to decide whether that's appropriate or not because the question is did we really get more value out of the depreciation of the equipment in year one then in year two was it more productive for us in year one than in year four so if we record the credit then what's going to happen when we hit enter this amount will go up bringing the book value down we're back in balance here if we still have the the equipment purchased for this amount less the accumulated depreciation leaving us with the salvage being the 20 000 what's going to happen next year in year five we're not going to record anything because we have depreciated it down to the salvage value