Question

Financial Accounting:

1- Describe the Double-Declining Balance (DDB) depreciation method. Explain a real life business example of an actual fixed asset being depreciated using the Double-Declining Balance (DDB) depreciation method. (Review pages 454 to 457 & pages 476 to 478)

2- Describe a bond issued at a premium. Explain why an investor would purchase a bond issued at a premium instead of a bond issued at par or a bond issued at a discount. (Review pages 515 to 520)

Answer 1

1. Double declining balance method:

As the name suggests, it is depreciation charged double to that under Straight Line Method. It is also known as Accelerated Depreciation or 200% declining balance method therefore asset would be depreciated faster than that under SLM method.

However the total depreciation under this method will not be greater the total depreciation under SLM method during the life of Asset. Therefore, Depreciation expense will be higher in the starting years of the asset and will be lower in the later years of the asset's life as compared to SLM method.

Declining Balance => Book Value at the beginning of any Accounting Period

Book Value => Cost of Asset - Accumulated Depreciation

Example: Asset purchased on 1 Jan. 2018 for $ 1,000,000 Salvage value is NIL Life of the Asset is 10 years. SLM Depreciation = 1,000,000 - NIL = 100,000 or 10% 10 Now depreciation under double declining balance method = 2 X 10% = 20% Therefore , yearly calculations will be as under : Year Book Value (Beginning) Rate Depreciation Book Value (Closing) 1 1,000,000 20%    200,000        800,000 2               800,000 20%    160,000        640,000 3               640,000 20%    128,000        512,000 4               512,000 20%    102,400        409,600 5               409,600 20%       81,920        327,680 6               327,680 20%       65,536        262,144 7               262,144 20%       52,429        209,715 8               209,715 20%       41,943        167,772 9               167,772 20%       33,554        134,218 10               134,218 20%       26,844        107,374 2. Bond Issued at Premium: If a Bond is trading in market at a value above it's par value then it is said to be at Premium.It happens when the coupon rate is higher then the current interest rates. An investor would purchase a bond issued at a premium instead of a bond issued at par or a bond issued at a discount because as the interest rates are greater , theregore, the interest payments are also greater than the current market.