Get your calculator ready or your spreadsheets at hand because calculating the double declining balance depreciation method takes a bit of work.
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Declining balance method of depreciation is an method in which the depreciation expense declines with age of the. Depreciation expense under the declining balance is calculated by applying the depreciation rate to the book value of the asset at the start of the period.While the method is straight-forward and most popular, there are instances in which it is not the most appropriate method. Assets are usually more productive when they are new, and their productivity declines gradually due to wear and tear and technological obsolescence. Thus, in the early years of their useful life, assets generate more revenues. For true and fair presentation of financial statements, requires us to match expenses with revenues.
Declining-balance method achieves this by enabling us to charge more in earlier years and less in later years. FormulaThere are different variants of declining-balance method: 150%-declining balance method, 200%-declining balance method (also called double-declining balance method) and so on.
The percentage is called accelerator and it reflects the degree of acceleration in depreciation. The basic formula for declining-balance depreciation (DBD) expense for a period is as follows: DBD = A ×1× (C - AD)Useful LifeWhere DBD is the declining-balance depreciation expense for the period, A is the accelerator, C is the cost and AD is the accumulated depreciation.is charged according to the above method if book value is less than the salvage value of the asset. No more depreciation is provided when book value equals salvage value.The declining-balance depreciation in which the depreciation rate is double (i.e. 200%) the straight-line depreciation rate is called double-declining depreciation. For straight-line depreciation rate of 8%, double declining balance rate will be 2 × 8% = 16%. Calculation StepsFollowing steps highlight all the intermediate calculations needed to arrive at the depreciation expense under the declining-balance method:STEP 1: Identify the asset's opening and its remaining useful life.STEP 2: Calculate the straight-line depreciation rate.
Straight-Line Rate =1Useful LifeSTEP 3: Identify the acceleration percentage and multiply it with the straight-line depreciation rate to work out the declining-balance depreciation rate. Declining-balance Depreciation Rate = Accelerator × Straight Line RateSTEP 4: Apply the declining balance depreciation rate to the opening book value of the asset to calculate the depreciation expense for the period. Declining-balance Depreciation Expense = Declining-balance Depreciation Rate × Opening Book ValueFor the first period, the equals cost and for subsequent periods, it equals the difference between cost. Declining-balance Depreciation Expense = Declining-balance Depreciation Rate × (Cost- Accumulated Depreciation)STEP 5: Subtract the depreciation expense from the opening book value of the asset and check that it is not less than the salvage value. If the closing book value is more than the salvage value, the depreciation expense worked out in Step 4 is the declining-balance depreciation expense for the period. However, if the book value drops below salvage value, calculate depreciation expense as the difference between opening book value and salvage value.
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Examples Example 1: Double-Declining Depreciation in First PeriodAn asset costing $20,000 has estimated useful life of 5 years and salvage value of $4,500. Calculate the depreciation for the first year of its life using double declining balance method.
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SolutionStraight-line Depreciation Rate = 1 ÷ 5 = 0.2 = 20%Declining Balance Rate = 2 × 20% = 40%Depreciation = 40% × $20,000 = $8,000 Example 2Referring to Example 1, calculate the depreciation of the asset for the second year of its life. SolutionDeclining Balance Rate = 40%Book Value = Cost − Accumulated Depreciation = $20,000 − $8,000 = $12,000Depreciation = 40% × $12,000 = $4,800 Example 3: Double-Declining Depreciation in Last PeriodCalculate the depreciation of the asset mentioned in the above examples for the 3 rd year.SolutionDeclining Balance Rate = 40%Book Value = $20,000 − $8,000 − $4,800 = $7,200Depreciation = 40% × $7,200 = $2,880The depreciation calculated above will decrease the book value of the asset below its estimated residual value ($7,200 − $2,880 = $4,320.
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