Question

Koffman’s Warehouse purchased a forklift on January 1, 2017, for $6,000. The forklift is expected to last for five years and have a residual value of $600. Koffman’s uses the double-declining-balance method for depreciation. Round amounts to the nearest dollar.

1. Identify and analyze the effect of the depreciation for 2017.

Affect:

Accounts:

Statement:

Answer 1

The double-declining balance depreciation (DDB) method, also known as the reducing balance method, is one of two common methods a business uses to account for the expense of a long-lived asset. The double-declining balance depreciation method is an accelerated depreciation method that counts as an expense more rapidly when compared to straight-line depreciation that uses the same amount of depreciation each year over an asset's useful life. Similarly, compared to the standard declining balance method, the double-declining method depreciates assets twice as quickly.

Computation of Depreciation under double-declining balance depreciation (DDB) method:

Useful Life = 5 Years

Depreciation rate under Straight Line Method would have been = 100% / 5Years = 20%

Therefore rate under double-declining balance depreciation (DDB) method = 2*20% = 40%.

Therefore, depreciation for the first year would be = $6,000*40% = $2,400

Written down value of Forklift = $6,000-$2,400 = $3,600.

The depreciation will affect the Income statement by $2,400 and will reduce the written down value of forklift.

The entry should be debit to depreciation account and crediting Accumulated depreciation account by $2,400.