Double Declining Balance Method of Depreciation:
Learning Objectives:
-
Define and explain the double
declining balance method of depreciation.
Double declining balance
method is another type of accelerated depreciation method followed
generally in USA. The depreciation expense is computed by multiplying the
asset cost less accumulated depreciation by twice the straight line rate
expressed in percentage. No provision is made for salvage value of the
asset.
Double declining balance
rate is found by using the following formula:
|
Double Declining Balance Rate = (100%/Years of Useful Life) × 2 |
Example:
A printing machine is
purchased for $20,000 on January 1991. The scrap value is estimated at
$2,000 at the end of 5 years useful life of the asset.
Required:
Calculate the annual depreciation charge by applying double declining
balance method
Solution:
Depreciation rate (100%/5) ×
2 = 40%
The following table shows the depreciation
for the five year period:
|
| End
of Year |
Asset Cost |
Rate
depreciation |
Amount depreciation |
accumulated depreciation |
Book
Value |
|
| 1 |
20,000 |
40% |
8,000 |
8,000 |
12,000 |
| 2 |
20,000 |
40% |
4,800 |
12,800 |
7,200 |
| 3 |
20,000 |
40% |
2,880 |
15,680 |
4,320 |
| 4 |
20,000 |
40% |
1,728 |
17,408 |
2,592 |
| 5 |
20,000 |
40% |
1,037 |
18,445 |
1,555 |
|
In applying this method the entire original
cost can never be depreciated. There is bound to be some balance though only
a small one. In this example, a salvage value of $1,555 is automatically
provided for. However, an asset should not be depreciated below it salvage
value of $2,000. Therefore the depreciation expenses at the end of fifty
year should be $592 and not $1,037
|
