Two major depreciation methods should be memorized for the CFA exams.

1. Straight line = (cost – salvage value) / useful life
2. Double Declining balance (DDB) = (cost – accumulated depreciation) / useful life x 2

Basically, the calculation is straight forward. The differences between the depreciations have already been highlighted.

Straight line method results in a constant depreciation every year, while the DDB method depreciates faster in the early years.

Traps and Tips:

One trap is that in the final year, if the calculated depreciation is less than the depreciable value, the asset should only be depreciated by the depreciable value. For example,

A machine has 5 years of useful life and cost $5000. If the salvage value is $1000, what is the depreciation from year 1 to year 5?

Year 1: ($5000 – $0) / 5 x 2= $2000                           Book Value = $3000

Year 2: ($5000 – $2000) / 5 x2 = $1200                     Book Value = $1800

Year 3: ($5000 – $2000 – $1200) / 5 x2 = $720          Book Value = $1080

Year 4: ($5000 – $2000 – $1200- $720)/5 x2 = $432

This is larger than the depreciable value ($80), therefore in year 4, depreciation is only $80 and BV is just the salvage value ($1000).

While for year 5, it is $0 it has reached salvage value in year 4 already, therefore, there is NO depreciation!

The calculation is pretty tedious. Therefore, you are advised to be familiar with the calculator. In BA II Plus, for example, you can find the depreciation easily by using the DEPR key.

[2nd] [DEPR/4]  then repeat: [2nd] [SET/ENTER]  several times until “DB” appears.

Type 200 [ENTER]. This is to set double declining balance method.

Press [↓], you will see

LIF, means useful life, type [5] [ENTER]

Press [↓], you will see

M01, the beginning month, usually you just need to use the first month of the year, so type [1] [ENTER]

Press [↓], you will see

CST, means cost, type [5000] [ ENTER]

Press [↓], you will see

SAL, means salvage value, type [1000] [ENTER]

Press [↓], you will see

YR, means the year you are interested in, to see the 2^nd year, type [2] [ENTER]

Press [↓], you will see

DEP, this is the calculated value of depreciation in 2^nd year (Should be 1200)

Press [↓], you will see

RBV, this is the calculated value of remain BV in 2^nd year (Should be 1800)

Press [↓], you will see

RDV, this is the calculated remaining depreciable value in 2^nd year (should be 800)

Keep pressing [↓], and you can change the YR to see the depreciation in different years.