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Accounting 3

Accounting 3. Chapter 21 Section 5. Declining Balance Method of Depreciation. Declining-Balance Method of Depreciation – Multiplying the book value of an asset by a constant percentage rate at the end of each fiscal period.

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Accounting 3

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  1. Accounting 3 Chapter 21 Section 5

  2. Declining Balance Method of Depreciation • Declining-Balance Method of Depreciation – Multiplying the book value of an asset by a constant percentage rate at the end of each fiscal period. • With straight-line depreciation the same amount of depreciation is expensed each fiscal period. In declining-balance, the same percentage rate is expensed each fiscal period. • The declining-balance method is used with some assets because they depreciate more in the early years of useful life than they do in later years. For example, cars depreciate more in the first years than in later years.

  3. Declining Balance Depreciation • The DB depreciation rate is a multiple of the straight-line rate. Many businesses use a rate that is two times the SL rate. • This is referred to as the double declining balance method.

  4. Calculating Depreciation Using the Double-Declining Balance Method • Estimated Depreciation Expense / Years of Estimated Useful Life = Straight-Line Rate of Depreciation • Straight-Line Rate x 2 = Double Declining-Balance Rate of Depreciation • Example of asset with 5 years of life: • (EDE) 100% / (YEUL) 5 = (SLR) 20% • (SLR) 20% x 2 = (DDBR) 40%

  5. Calculating the Last Year’s Depreciation Expense • A plant asset is never depreciated below its estimated salvage value. • So in its last year of useful life, only enough depreciation expense is recorded to reduce the book value to the asset’s salvage value. • To do this, you subtract the salvage value from the beginning book value of that year. The difference is the depreciation expense for the last year.

  6. Plant Asset : __________________ Original Cost: _______________________ Depreciation Method: ______________ Estimated Salvage Value: _____________ Estimated Useful Life: ________________ Year Beginning Declining Annual Ending Book Value Balance Rate Depreciation Book Value Work Together p. 565next three slides, assignment on last slide Computer $2,300.00 Declining-Balance $200.00 4 years 2007 $2,300.00 50% $1,150.00 $1,150.00 2008 $1,150.00 50% $575.00 $575.00 2009 $575.00 50% $287.50 $287.50 2010 $287.50 $87.50 $200.00

  7. Plant Asset : __________________ Original Cost: _______________________ Depreciation Method: ______________ Estimated Salvage Value: _____________ Estimated Useful Life: ________________ Year Beginning Declining Annual Ending Book Value Balance Rate Depreciation Book Value Cash Register $1,200.00 Declining-Balance $100.00 5 years 2007 $1,200.00 40% $480.00 $720.00 2008 $720.00 40% $288.00 $432.00 2009 $432.00 40% $172.80 $259.20 2010 $259.20 40% $103.68 $155.52 2011 $155.52 $55.52 $100.00

  8. Plant Asset : __________________ Original Cost: _______________________ Depreciation Method: ______________ Estimated Salvage Value: _____________ Estimated Useful Life: ________________ Year Beginning Declining Annual Ending Book Value Balance Rate Depreciation Book Value Clothing Rack $500.00 Declining-Balance $50.00 5 years 2007 $500.00 40% $200.00 $300.00 2008 $300.00 40% $120.00 $180.00 2009 $180.00 40% $72.00 $108.00 2010 $108.00 40% $43.20 $64.80 2011 $64.80 $14.80 $50.00

  9. Assignment • Do Application 21-6 by hand. • Do Mastery Problem on the computer. Print off all journals, ledgers, and plant asset lists used. *Hint: You must enter all information for depreciation tables to work. • Turn both of these assignments into Mrs. Middleton. • Move on to Chapter 22.

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