Wize University Introduction to Financial Accounting Textbook > Long-Term Assets
Double-Declining Balance Method
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Double-Declining Balance Method
The double-declining balance method is an accelerated and a declining-balance method of depreciation. This means that the annual depreciation is based on the previous periods carrying value, and decreases overtime.
Characteristics of the Double-Declining Balance Method
- Most appropriate for assets that will be used more in their early life or will age quickly.
- Annual depreciation decreases each year.
- Depreciation is based on a depreciation rate.
- Depreciates more in the early life of the asset.
Watch Out!
An asset cannot be depreciated below its residual value.
Double-Declining Balance Formula
Watch Out!
Depreciation expense must be adjusted if an asset is not owned for an entire year. For example, if an asset is purchased on December 1st and the year-end is December 31st, it will only be depreciated by 1/12th of the annual amount.
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Example: Double-Declining Balance Method
On April 1st, 2020, Wize Corp. purchased a used machine to use in its operations by signing a 5-year, $500,000 note at 5% interest. Closing fees for the transactions totalled $5,000 which included (notary fees and brokerage). The purchase was also subject to 10% sales tax which was paid in cash at the time of purchase. Wize Corp. paid $10,000 to a shipping company to delivery and install the machine at the company's facility, and spent another $6,000 repairing the machine's defects prior to putting it in use. The company's fiscal year ends December 31st.
The acquisition cost of the machine totalled $521,000, and the company estimates that it will be used for 10 years and have a residual value of $11,000.
Using the double-declining balance method, determine the depreciation expense to be recorded on December 31st, 2020 and 2021.
Practice: Double-Declining Balance Method
On February 1st, 2020, KG Corp. purchased machinery for $90,000 cash. The company also had to pay $10,000 for delivery and installation. The machine has an estimated useful life of 10 years and a residual value of $4,000. The company's fiscal year ends October 31st and it depreciates its machinery using the double-declining balance method.
Practice: Double-Declining Balance Method
Ultra Drilling Corporation owns a deep sea drill that was purchased for $5 million dollars on January 1st, 2015. It was estimated that the drill would be used for 4 years and would have a residual value of $400,000 at the end of its life. The company depreciates the drill using the double-declining balance method.
Compute the depreciation expense for each year, assuming their fiscal year ends December 31. The drill is still in operation as of December 31st, 2019.