Question

Cutter Enterprises purchased equipment for $72,000 on January 1, 2016. The equipment is expected to have a five-year life and a residual value of $6,000. Using the double-declining balance (DDB) method, depreciation for 2017 and book value at December 31, 2017, would be

Answer 1

ANSWER:

Under the double declining balance method the depreciation expense for a year is based on twice the depreciation rate. It is a kind of accelerated depreciation where the Highest amount of depreciation expense will be charged on the begining years of assets's useful life.

Equipment purchase cost = $72000

Residual value = $6000

Useful Life = 5 years

Depreciation rate = 1/Useful life = 1/5 years = 20%

So, Twice the depreciation rate = 2*20% = 40%

Depreciation expense for the year ended dec 31 2016 = Purchase cost*Twice the depreciation rate = $72000*40% = $28800

Book value at the end of dec 31 2016 = Equipment purchase cost-Depreciation expense for the year ended dec 31 2016 = $72000-$28800 = $43200

So,

• Depreciation expense for the year ended 31 dec 2017 = Book value at the end of dec 31 2016* Twice the depreciation rate = $43200*40% = $17280

• Book value at the end of 31 dec 2017 =  Book value at the end of dec 31 2016-Depreciation expense for the year ended 31 dec 2017 = $43200-$17280 = $25920