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Depreciation Methods:
Double Declining Balance Method
Presentation by

Carlota N. Villaroman

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Depreciation
Depreciationspread out over its is an expense The cost is based on theuseful life in the form estimated expectation that an asset will gradually decline of an expense given various in usefulness due to time, depreciation methods. wear and tear, or obsolescence.

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IN ACCOUNTING 200 The method of depreciation to be used or adopted DEPENDS on the benefit from the use of the asset and the purpose it serves.

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3 Recommended Depreciation Questions

Is depreciation reflected in the earnings statement?

Is management using conservative and (as much as possible) accurate depreciation rates
Are the cost or base to which the depreciation rates applied reasonably accurate?

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A company can depreciate different assets using different depreciation rates (and different useful lives). Whatever depreciation rate is chosen, however, it must generally be used throughout the useful life of that asset. Changes to depreciation rates can be made, but they must be justified as providing better quality financial reports. The using up of an asset generally relates to physical or technological obsolescence.

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Shortcomings of SLM
It may underestimate the expense of operation of the business during the early years of life of asset.
Obsolence of an asset due to continuous improvement of new models is not taken into account.

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This is why..

ACCELERATED DEPRECIATION METHOD came about!!!

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Depreciation Methods
Straight-line depreciation allocates an equal amount of the cost of a plant asset to expense during each fiscal period of the assets expected useful life.

WHILE
Accelerated depreciation allocates a larger portion of the cost of a plant asset to expense early in the assets life.
Continued

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Accelerated Depreciation Mehod

It has the effect of reducing income taxes in early years and increasing retained cash.
Double-Declining-Balance is an example of an accelerated method.

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DDBM
DDBM is just a modification of DECLINING BALANCE METHOD. It is like the straight-line method on steroids. In DBM, rate used is derived while in DDBM, the rated used is obtained by doubling the straight line rate.

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In Accounting Parlance
DEPRECIATION IS SIMPLY A PROCESS OF ALLOCATION AND NOT OF VALUATION.
The objective of depreciation is to have each period benefiting from the use of the asset bear an equitable share of the asset cost.

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In MATH OF I
DDBM provides higher depreciation in the earlier years and lower depreciation in the later years of assets life. Thus, it results to decreasing depreciation charge over the useful life.

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This is on the PHILOSOPHY that new assets are generally capable of producing more revenue in the earlier years than in the later years

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Also, the COST OF USING an asset includes not only depreciation but also REPAIRS on such assets.

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The overall effect would be a uniform charge because depreciation and repairs will equalize each other.

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So if we are going to ask:

Does the straight line depreciation method and the double declining balance depreciation method produce the same book value each year? No. The choice of depreciation method has an impact on net asset value and taxation.

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The different techniques produce different book values on a year-to-year basis, however, by the end of the useful life of the asset, the book values are the same. All things being equal, if one earns interest on the cash balances, the doubledeclining method produces a higher book value by the end of the useful life of the asset.

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Accelerated depreciation means that an asset will be depreciated faster than would be the case under the straight line method. Although the depreciation will be faster, the total depreciation over the life of the asset will not be greater than thetotal depreciation using the straight line method.

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So if we are going to ask:

Do the straight-line method and the production method and the double-declining-balance method differ in their effect on the company's profitability? The Straight-Line method tends to produce higher net income numbers and higher long-lived asset book values in the early years of a long-lived asset's life.

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Depreciation
12%
Straight-line

82%

5% 1%

Accelerated Units-ofproduction Other

Depreciation Methods Used by Major Corporations for Financial Reporting

Data Source: AICPA, Accounting Trends and Techniques, 2010

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When is DDBM used?

When the newly acquired asset is used article.

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Most companies will not use the double-declining balance method of depreciation on their financial statements.

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Reasons for Using Accelerated Depreciation

1. An asset is more useful earlier in its life than later, and the useful life may be difficult to estimate. 2. Depreciation expense is deductible in computing taxable income and income taxes.

The second reason is the most common reason for using accelerated depreciation.

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Reminders in DDBM:
Rate is fixed. (It is also known as 200% declining balance.) It does not attempt to reproduce the salvage value at the end of the useful life. (S is insignificant) Depreciation should be limited to the remaining carrying amount of the asset reduced by salvage proceeds, if any.

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Depreciation Rate Assumptions

1. The asset is used up by the same amount each period. 2. The asset is used up more in the early years of its useful life. 3. The asset is used up in proportion to its actual usage.

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Straight-Line Calculation
Moms Cookie Company purchased equipment at a cost of S50,000. Management expects the equipment to have a four-year life and a S2,000 residual value. Cost Residual Value $50,000 $2,000
The rate is 100%Expected Life divided by 4 years = 4 years

25%

Straight-Line Depreciation

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Straight-Line Depreciation Schedule

An equal amount of depreciation is recorded each fiscal year.

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DDBM Depreciation
If Moms Cookie Company used doubledeclining-balance method, it would Multiply the straight-line rate by two, e.g. 2/1 x = 2/4
Double-declining-balance depreciation expense
2 x straight-line

= Book Value x
Expected useful life

$25,000 = $50,000 x

2 4

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Double-Declining Balance Depreciation Schedule

A B C D E Double(A xB) ($50k - D) Declining- Beginning Debit Credit Ending Balance Book Depreciation Accumulated Book Rate Value Expense Depreciation Value 2/4 $50,000 $25,000 $25,000 $25,000 2/4 25,000 12,500 37,500 12,500 2/4 12,500 6,250 43,750 6,250 2/4 6,250 4,250 48,000 2,000

Year 2004 2005 2006 2007

$6,250 $2,000 (residual value) Accelerated Depreciation

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Comparison of Straight-Line and Accelerated Depreciation Methods

Straight-Line Accelerated Income before depreciation and taxes $100,000 $100,000 Depreciation expense 12,000 25,000 Pretax income 88,000 75,000 Income taxes (35%) 30,800 26,250 Net income $ 57,200 $ 48,750

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DDBM Formulae
d=2/t
where: d=depreciation rate t=expected useful life C=orignal cost of depreciable asset BVk=book value at k Dk=depreciation charge at k

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Depreciation charge can also be

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An asset costing 4700 depreciates to 600 in 10 years. Find the depreciation charge and book value at the end of the seventh year. Prepare depreciation table for this asset.
d = 2/10 = 0.20

C = 4700
S = 600

Find D7 and BV7

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Using the deprn charge formula

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Using the book value formula

Depreciation Table
k 0 1 2 3 4 5 6 Dk 0 940 750 601.6 481.28 385.02 308.02 ADk 0 940 1692 2293.6 2774.88 3159.90 3467.92 BVk 4700 3760 3008 2406.4 1925.12 1540.10 1232.08

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7
8 9 10

246.42
197.13 157.71 30.82 (126.16*)

3714.34
3911.47 4069.18 4100 (4195.34*)

985.66
788.53 630.82 600 (504.66*)

Graph of Accrued Depreciation and Book Value

5000 4500 4000 3500 3000 Value 2500 2000

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1500
1000 500 1 2 3 4 5 6 7 8 9 10 11 Year 0 1 2 3 4 5 6 7 8 9 10 Depr'n Charge 0 940 750 601.6 481.28385.02308.02246.42197.13157.71 30.82 Accrued Depr'n 0 940 1692 2293.62774.93159.93467.93714.33911.54069.2 4100 Book Value 4700 3760 3008 2406.41925.11540.11232.1985.66788.53630.82 600 0