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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

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You may also be interested in other articles from "accounting for depreciation" chapter:

  1. Definition and Explanation of Depreciation
  2. Causes of Depreciation
  3. Need for Depreciation
  4. Depreciation, Depletion and Amortization
  5. Difference Between Depreciation and Fluctuation
  6. Basic Factors of Determination of Depreciation
  7. Depreciation Methods / Methods for Providing Depreciation
  8. Fixed Installment Method / Straight Line Method / Original Cost Method
  9. Diminishing balance/written Down Value/Reducing Installment Method of Depreciation
  10. Annuity Method of Depreciation
  11. Depreciation Fund Method or Sinking Fund Method
  12. Insurance Policy Method of Depreciation
  13. Revaluation Method of Depreciation
  14. Sum of the Years' Digits Method of Depreciation
  15. Double Declining Balance Method of Depreciation
  16. Depletion Method of Depreciation
  17. Basis of Use System of Depreciation
  18. Depreciation Of Various Assets
  19. Depreciation Accounting - General Questions and Answers

 

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