- Tags:asset, depreciation, double declining depreciation, straight line depreciation, value
- By: Dan
- July 23, 2013
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Double-Declining Method Depreciation
To implement the double-declining depreciation formula for an Asset you need to know the asset’s purchase price and its useful life.
First, Divide “100%” by the number of years in the asset’s useful life, this is your straight-line depreciation rate. Then, multiply that number by 2 and that is your Double-Declining Depreciation Rate. In this method,depreciation continues until the asset value declines to its salvage value.
Use the following formula to calculate straight-line depreciation rate:
Straight-line Depreciation Rate = Depreciation Expense / Depreciable Base
Use the following formula to calculate double-declining depreciation rate:
Double-declining Depreciation Rate = Straight-line Depreciation Rate x 2
Double-Declining Method Calculation Example:
Fedcorp Industries made a purchase of a delivery van to transport merchandise. The van purchase price is $1,000. Fedcorp also determines that the van’s will retain a useful life of 5 years. Using the information that the company has determined, how would Fedcorp Industries determine the double-declining depreciation rate on the delivery van?
First Divide 100% by 5 years
100% / 5 = 20%
Then, multiply that percentage by 2
20% x 2 = 40%
Your Double-Declining Depreciation rate is 40%. Which translates to depreciation of $400 per year for the company’s van.
Stop Calculating depreciation in the year after the depreciable cost falls below the salvage value of the vehicle.
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The article you've shared delves into the Double-Declining Depreciation method, an essential aspect of accounting for assets' depreciation. This method involves determining an asset's depreciable base, salvage value, and useful life. As an expert in accounting practices, I can elaborate on the concepts highlighted in this article:
Double-Declining Depreciation Method:
- Purpose: It's a technique used to accelerate the recognition of asset depreciation expenses.
- Formula for Straight-Line Depreciation Rate: Straight-line Depreciation Rate = Depreciation Expense / Depreciable Base.
- Formula for Double-Declining Depreciation Rate: Double-Declining Depreciation Rate = Straight-Line Depreciation Rate x 2.
- Calculation Example: The article illustrates this method through Fedcorp Industries' purchase of a delivery van priced at $1,000 with a determined useful life of 5 years.
- First, determine the straight-line depreciation rate: ( \text{Straight-line Depreciation Rate} = \frac{\text{Depreciation Expense}}{\text{Depreciable Base}} ). Here, ( \text{Depreciable Base} = \text{Asset's Purchase Price} - \text{Salvage Value} ).
- Calculate the straight-line rate: ( \text{Straight-line Depreciation Rate} = \frac{1,000 - \text{Salvage Value}}{5 \text{ years}} ).
- Double the straight-line rate to obtain the double-declining depreciation rate: ( \text{Double-Declining Depreciation Rate} = \text{Straight-Line Depreciation Rate} \times 2 ).
- This rate determines the annual depreciation expense: ( \text{Depreciation Expense} = \text{Double-Declining Depreciation Rate} \times \text{Asset's Book Value} ).
Asset Depreciation Concepts:
- Depreciable Base: It's the portion of an asset's cost that can be depreciated over its useful life.
- Salvage Value: The estimated residual value of an asset at the end of its useful life.
- Useful Life: The expected duration over which an asset will be operational before it's deemed no longer useful.
- Depreciation Expense: The allocated cost of an asset over its useful life.
- Book Value: The value of an asset as it appears on a balance sheet, calculated as the asset's cost minus accumulated depreciation.
Related Accounting Topics:
- Financial Statements & Reports: Depreciation impacts the balance sheet and income statement.
- GAAP / IFRS: Depreciation methods must adhere to Generally Accepted Accounting Principles or International Financial Reporting Standards.
- Profitability: Understanding depreciation's influence on a company's overall profitability.
- Tax: Depreciation is often used for tax deductions.
The article emphasizes the importance of accurately calculating depreciation to reflect an asset's true value and the impact on a company's financial statements and decision-making processes. Mastering these concepts is crucial for effective financial management and compliance with accounting standards.
