A videorecording system was purchased 3 years ago at a cost

A video-recording system was purchased 3 years ago at a cost of $38,000. A 5-year recovery period and DDB (Double Declining Balance) depreciation have been used to write off the basis. The system is to be replaced this year with a trade-in value of $6,500. What is the difference between the book value and the trade-in value? The difference between the book value and the trade-in value is $ ______.

Solution

Useful life = 5 years

SL depreciation rate = 1/5 = 20%

So,

DDB depreciation in year 1 = 38000*200%*20% = $15200

DDB depreciation in year 2 = (38000-15200)*200%*20% = $9120

DDB depreciation in year 3 = (38000-15200 - 9120)*200%*20% = $5472

Now,

Book value after the year 3 = 38000 - (15200+9120+5472) = $8208

Trade-in value = $6500

Difference between book value (after year 3) and trade-in value = 8208-6500

Difference between book value (after year 3) and trade-in value = $1708