Section 5 - The Declining Balance Method of Depreciation Flashcards Preview

Mastering Depreciation > Section 5 - The Declining Balance Method of Depreciation > Flashcards

Flashcards in Section 5 - The Declining Balance Method of Depreciation Deck (21):
1

On January 1, Capp Co which uses double declining balance depreciation acquired a machine with an original cost of $100,000, an estimated life of 7 years and an estimated residual value of $11,000.

 

What is the annual depreciation in Year 2?

When solving a problem using the declining balance method, the first step is to compute the depreciation rate which in this case is 200%, double the straight-line rate.

 

Using the faster, easier way to calculate, the depreciation rate is found as follows:

 

 dp (declining percentage)                   2     = 28.6%

      n (number of years)                         7

 

Annual Depreciation Expense = Beginning Book Value x Depreciation Rate

 

Year 1 depreciation = $100,000 x 28.6% = $28,600

Year 2 depreciation = $71,400** x 28.6% = $20,420.40

 

In Year 2, the beginning book value is found by subtracting accumulated depreciation from the cost. In year one, the company recognized $28,600 in depreciation expense, therefore, at the beginning of Year 2, the book value of the machine is $71,400. ($100,000 - $28,600)

2

How is residual value accounted for in the final year under the declining balance method?

Depending on the balance in the accumulated depreciation account, the depreciation expense recognized in the final year can be more or less than the calculated amount. In simple terms, the depreciation expense amount recognized in the final year cannot bring the accumulated depreciation balance higher than the depreciable base, and it cannot bring the book value lower than the residual value, in which case, the depreciation expense generally reflects a plugin number.

3

Assets that are more efficient in its earlier years than it will be in its later years are generally depreciated using which method of depreciation?

Declining Balance Method

4

Under the declining balance method, annual depreciation equals:

Depreciation rate x book value

 

True or False

True.

5

On January 1, Capp Co which uses 150% declining balance depreciation acquired a machine with an original cost of $30,000, an estimated life of 4 years and an estimated residual value of $3,000.

 

What is the annual depreciation in Year 3?

When solving a problem using the declining balance method, the first step is to compute the depreciation rate which in this case is 150% of the straight-line rate.

 

Using the faster, easier way to calculate, the depreciation rate is found as follows:

 

 dp (declining percentage)                   150%     = 37.5%

      n (number of years)                           4

 

Annual Depreciation Expense = Beginning Book Value x Depreciation Rate

 

Year 1 depreciation = $30,000 x 37.5% = $11,250

Year 2 depreciation = $18,750** x 37.5% = $7,031.25

Year 3 depreciation = $11,718.75** x 37.5% = $4,394.53

 

In Year 2, the beginning book value is found by subtracting accumulated depreciation from the cost. In year one, the company recognized $11,250 in depreciation expense, therefore, at the beginning of Year 2, the book value of the machine is $18,750. ($30,000 - $11,250)

 

In Year 3, the beginning book value is found by subtracting accumulated depreciation from the cost. The company recognized $11,250, and $7,031.25 in Years 1 and 2 respectively. In total, accumulated depreciation from Years 1 and 2 is $18,281.25, therefore, at the beginning of Year 3, the book value of the machine is $11,718.75. ($30,000 - $18,281.25)

6

Aiden Co uses DDB and purchased equipment with an acquisition cost of $125,000 with a residual value of $9,000 and an estimated useful life of 7 years.

 

Given the information above, what is the depreciation expense for Year 1?

Using the faster, easier formula to calculate the depreciation rate as follows:

 

  2         = 28.6%

  7

 

After the depreciation rate is calculated, the next step is to multiply the rate by the book value at the beginning of the year in which depreciation is being recognized.

 

Year 1 depreciation expense: $125,000 * 28.6% = $35,750

7

An asset is considered fully depreciated when

An asset is considered fully depreciated when the balance in the accumulated depreciation account is equal the depreciable base, and the book value is equal to the residual value.

8

Under the declining balance method, how is an asset depreciated if it was purchased during the year?

Under the declining balance method, to depreciate assets purchased during the year, the annual depreciation expense must be multiplied by the portion of the year the asset was in use.

 

For example, if an asset was placed in service on May 1st, the company will recognize depreciation for 8 out of 12 months. If an asset was acquired on October 1st, the company will recognize depreciation for 3 out of 12 months.

9

How is the residual value treated under the declining balance method?

The declining balance is different when compared to the straight-line, units of production and sum-of-the-years-digits method because the residual value is not deducted from the cost in calculations. However, the estimate is considered in the final year of the asset's life because an asset cannot be depreciated below its residual value.

10

Under the declining balance method, whatever rate the company selects, it must be used for the entire life of the asset unless?

The same rate must be used unless the company decided to revisit the asset's estimated useful life.

11

 After the declining balance rate has been calculated, to find depreciation expense under the declining balance method, the rate is multiplied by

As compared to the straight-line, units of production, and sum-of-the-years-digits method, the declining balance method multiples the rate by the assets book value at the beginning of the year, not the depreciable base.

12

Aiden Co uses DDB and purchased equipment with an acquisition cost of $125,000 with a residual value of $9,000 and an estimated useful life of 7 years.

 

Given the information above, what is the depreciation rate?

Using the faster, easier formula, the depreciation rate is calculated as follows:

 

200%     = 28.6%

  7

 

Every year, the book value will be multiplied by the depreciation rate/

13

 In the first year of an assets useful life, the book value will always be equal to the cost of the asset since no depreciation has been taken.

 

True or False

True.

 

Book value = Cost - Accumulated Depreciation

 

When an asset is purchased, in the first year, there has been no prior depreciation recognized so the associated Accumulated Depreciation account has a balance of $0, therefore, the book value in the first year is equal to the cost.

14

The declining balance method provides ____ depreciation in the early years and _____ in the later years.

More, Less

15

What makes the declining balance unique when compared to the other methods?

The depreciation rate is multiplied each year by the book value, not the depreciable base as used in the other methods

16

The formula below calculates:

 

    DP     (dp = Declining percentage)

    N         (n= estimated useful life)

The declining balance rate

17

What is the formula to calculate the depreciation rate under the Declining Balance method?

The declining balance depreciation rate is found as follows:

 

       1           = Straight Line Rate x Declining Balance % = Declining Balance Rate

Useful Life

18

The depreciation rate for the DB method is a multiple of the straight line rate. 

 

True or False

True.

 

When it comes to the declining balance method, any percentage may be used, however, the most common declining balance rates are:
 

  • 200% - 2 x’s straight-line rate (referred to as double declining balance)
  • 150% - 1.5 x’s straight-line rate
  • 125% - 1.25 x’s straight-line rate

19

Under the declining balance method, depending on the balance in the accumulated depreciation account, the depreciation expense recognized in the final year can be more or less than the calculated amount. 

 

True or False

True.

 

Under the declining balance method, the depreciation expense amount recognized in the final year cannot bring the accumulated depreciation balance higher than the depreciable base, and it cannot bring the book value lower than the residual value, in which case, the depreciation expense generally reflects a plugin number.

20

Under the declining balance method, the percentage most commonly used is?

Under the declining balance method, 200%, also referred to as the double declining balance" is the rate most commonly used.

21

On August 1, Mama Co purchased equipment with an original cost of $65,000, an estimated useful life of 5 years and a residual value of $5,000. If MamaCo uses the double declining balance method of depreciation, what is Depreciation for Years 1 and 2 respectively?

When solving a problem using the declining balance method, the first step is to compute the depreciation rate which in this case is 200%, double the straight-line rate.

 

Using the faster, easier way to calculate, the depreciation rate is found as follows:

 

 dp (declining percentage)                   2     = 40%

      n (number of years)                         5

 

Annual Depreciation Expense = Beginning Book Value x Depreciation Rate

 

Year 1 depreciation = $65,000 x 40% = $26,000

Because the asset was placed in service on August 1, the asset was used in the business for 5 out of 12 months in the year. Therefore, the company must recognize partial year depreciation in Year 1.

 

Year 1 depreciation = ($26,000 x 5/12) = $10,833.33

Year 2 depreciation = $54,166.67** x 40% = $21,666.67

 

In Year 2, the beginning book value is found by subtracting accumulated depreciation from the cost. In year one, the company recognized $10,833.33 in partial-year depreciation expense, therefore, at the beginning of Year 2, the book value of the machine is $54,166.67 ($65,000 - $10,833.33)