Double Declining Balance Method of Depreciation

12/08/2008 23:25

 

Double Declining Balance Method of Depreciation:

Learning Objectives:

  1. 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