Financial Accounting: An Integrated Statements Approach, 2nd Edition

minus accumulated depreciation) of the asset is multiplied by this rate. To illustrate,

the amount of annual double-declining-balance depreciation for an asset with an esti-

mated five-year life and a cost of $24,000 is shown below.

Accum. Depr. Book Value Book Value

at Beginning at Beginning Depreciation at End

Year Cost of Year of Year Rate for Year of Year

1 $24,000 $24,000.00 40% $9,600.00 $14,400.00

2 24,000 $ 9,600.00 14,400.00 40 5,760.00 8,640.00

3 24,000 15,360.00 8,640.00 40 3,456.00 5,184.00

4 24,000 18,816.00 5,184.00 40 2,073.60 3,110.40

5 24,000 20,889.60 3,110.40 — 1,110.40 2,000.00

You should note that when using the declining-balance method, the estimated

residual value is not considered in determining the depreciation rate. It is also ignored

in computing the periodic depreciation. However, the asset should not be depreciated

below its estimated residual value. In the above example, the estimated residual value

was $2,000. Therefore, the depreciation for the fifth year is $1,110.40 ($3,110.40$2,000.00)

instead of $1,244.16 (40%$3,110.40).

In the example, we assumed that the first use of the asset occurred at the begin-

ning of the fiscal year. This is normally not the case in practice, however, and depre-

ciation for the first partial year of use must be computed. For example, assume that the

asset above was in service at the end of the third month of the fiscal year. In this case,

only a portion (–– 129 ) of the first full year’s depreciation of $9,600 is allocated to the

first fiscal year. Thus, depreciation of $7,200 (–– 129 $9,600) is allocated to the first par-

tial year of use. The depreciation for the second fiscal year would then be $6,720

[40%($24,000$7,200)].

Comparing Depreciation Methods

The three depreciation methods can be compared as shown in Exhibit 6. All three

methods assign a portion of the total cost of an asset to an accounting period, while

never depreciating an asset below its residual value. The straight-line and declining-

balance methods assign depreciation to the period on the basis of the life of the asset,

while the units-of-production method assigns cost on the basis of use. The straight-line

method provides for the same periodic amounts of depreciation expense over the life

of the asset. The units-of-production method provides for periodic amounts of depre-

ciation expense that vary, depending upon the amount the asset is used.

The declining-balance method provides for a higher depreciation amount in the

first year of the asset’s use, followed by a gradually declining amount. For this reason

408 Chapter 9 Fixed Assets and Intangible Assets

Q.A truck that cost

$35,000 has a residual

value of $5,000 and a

useful life of 12 years.

What is the double-

declining-balance depreci-

ation for the second full

year of use?

A.$4,861 {[$35,000 

($35,000 162 – 3 %)]

162 – 3 %}

Asset Life Asset Cost Depreciation Depreciation Expense

Method Expressed in Depreciated Rate Pattern over Time

Straight-line Years Cost less 100%  Level

residual value Estimated Life

Units-of- Total estimated Cost less (Cost Residual Variable

production units produced residual value Value) Total

or used Estimated Units

Produced or Used

Declining- Years Declining book (100%  Declining

balance value, but not Estimated

below residual Life)  2

value

Exhibit 6

Comparing

Depreciation Methods