Question

after doing ddb and finding that the book value of year five doesn't equal zero, how to switch to SL method?
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Answer 1

DDB or double declining balance method is an accelerated method of depreciation. The rate is double the rate applicable under the straight line method.

Assume that the price of the asset is $100,000 and the life is 5 years. So depreciation rate = 100%/5*2 = 40% per year.

The annual depreciation and book values are shown below:

	Opening book value	Depreciation	Closing book value
Year 1	100,000.00	40,000.00	60,000.00
Year 2	60,000.00	24,000.00	36,000.00
Year 3	36,000.00	14,400.00	21,600.00
Year 4	21,600.00	8,640.00	12,960.00
Year 5	12,960.00	5,184.00	7,776.00

As we can see from the table above that the book value at the end of 5th year is $7,776.

Switching to SL method will mean a fixed rate of depreciation of 100%/5 = 20% per year

	Depreciation under DDB method	Depreciation under SL method	Selected depreciation amount	Book value
Year 0				100,000.00
Year 1	40,000.00	20,000.00	40,000.00	60,000.00
Year 2	24,000.00	15,000.00	24,000.00	36,000.00
Year 3	14,400.00	12,000.00	14,400.00	21,600.00
Year 4	8,640.00	10,800.00	10,800.00	10,800.00
Year 5	5,184.00	10,800.00	10,800.00	0.00

From the above table we can see that switching of methods will lead to book value being nil at the end of 5th year.

Explanation: Dpreciation under SL method: Year 2 amount = $60,000 (book value)/4 years = 15,000

Year 3 amount = $36,000/3 = 12,000

Year 4 amount = $21,600/2 = 10,800

Year 5 amount = $10,800/1 = $10,800