SUM OF THE YEARS DIGIT METHOD

The sum of the years' digits method is used to accelerate the recognition of
depreciation. Doing so means that most of the depreciation associated with
an asset is recognized in the first few years of its useful life. This method is
also called the SOYD method.

The method is more appropriate than the more commonly-used straight-line

depreciation if an asset depreciates more quickly or has greater production
capacity in its earlier years than it does as it ages. The total amount of
depreciation is identical no matter which depreciation method is used - the
choice of depreciation method only alters the timing of depreciation
recognition.

Use of the method can have an indirect impact on cash flows, since
accelerated depreciation can reduce the amount of taxable income, thereby
deferring income tax payments into later periods.

Disadvantages of Sum of the Years’ Digits Depreciation

A problem with using this or any other accelerated depreciation method is

that it artificially reduces the reported profit of a business over the near term.
The result is excessively low profits in the near term, followed by excessively
high profits in later reporting periods. It is also more complex to calculate
than straight-line depreciation, which can lead to errors in the calculation.
Formula:

n
Sum of the Years Digit Method (SYDM) = ---------- ( 1 + n )
2

For example: n = 8

8
Sum of the Years Digit (SYDM) = ---------- ( 1 + 8 ) = 36
2

Sum of the Years Digit (SYDM) = 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 = 36

DEPRECIATION:

YEAR DEPRECIATION

1 (F.C. – S.V.) 8/36

2 (F.C. – S.V.) 7/36 (FC – SV) (8+7+6)/36

9,000-
3 (F.C. – S.V.) 6/36

4 (F.C. – S.V.) 5/36

5 (F.C. – S.V.) 4/36

6 (F.C. – S.V.) 3/36

7 (F.C. – S.V.) 2/36

8 (F.C. – S.V.) 1/36

BOOK VALUE (BV)

BV = F.C. – TOTAL DEPRECIATION

Book Value after 4th Year:

(8 + 7 + 6 + 5)
BV4 = F.C. - (F.C – S.V.) ---------------------
36
EXAMPLE:

An equipment cost P8,000 has an economic life of 8 years and a salvage value
of P400 at the end of 8 years. How much is the depreciation on the 1st year?

What is the sum of the years digit ?

n/2 ( 1 + n) = 36

(F.C. – S.V.) n/soyd = 1,688.89

BV3 = P8,000 - [(8000-400) ((8+7+6)/36)] = 3,566.67

Example of Sum of the Years' Digits Depreciation

ABC Company purchases a machine for $100,000. It has an estimated salvage value of
$10,000 and a useful life of five years. The sum of the years' digits depreciation
calculation is:

SYD = 5(5+1) / 2 = 15 15

This formula yields the sum of each year of the estimated useful life:

1 + 2 + 3 + 4 + 5 = 15

Remaining
estimated useful Applicable Annual
Year life at beginning of SYD percentage depreciation
year

1 5 5/15 33.33% $30,000

2 4 4/15 26.67 24,000

3 3 3/15 20.00 18,000

4 2 2/15 13.33 12,000

5 1 1/15 6.67 6,000

Totals 15 100.00% $90,000

An Asset is purchased for P9,000. Its estimated life is 10 years, after which it will
be sold for P1,000. Find the book value during the 9th year if the sum-of-the-
years digit (SOYD) method is used.

SOYD = 10/2 (11) = 5(11) = 55

Bv9 = 9,000 – ((9,000-1000) ((10+9+8+7+6+5+4+3+2)/55) ) = P1,145.45