Question

how to switch from straight line to double-declining-balance method? give an example.

Answer 1

Depreciation expense under straight-line method is calculated by deducting the salvage value from the total cost of the asset divided by the number of years of life. The depreciation expense under straight line method is same in all the years.

Depreciation expense under double-declining balance method is calculated by dividing 100 by the total number of years of life and multiply with 2 and then multiply with the total cost of the asset. The depreciation expense under double declining balance method is charged high in the beginning because the depreciable rate is high and the total cost is high but gradually the book value of the asset decreases year by year because after first year, the depreciation is calculated on the book value after deducting previous year depreciation.

The same is shown in the below example -

Cost of the asset $50,000

Salvage value $5,000

Number of years of life 3 years

Straight line method:

Depreciation Expense in year 1 = $50,000 - $5,000 = $45,000/3 years

= $15,000

Each year, the depreciation expense is $15,000 in remaining year 2 & 3.

Double-declining balance method:

Depreciation Expense in year 1 = 100/3 years * 2 * $50,000

= $33,333

Depreciation Expense in year 2 = $50,000 - $33,333 = $16,667*100/3 years * 2

= $11,111

Depreciation Expense in year 3 = $50,000 - $33,333 - $11,111 = $5,556*100/3 years * 2

= $3,704

The method of depreciation can be switched from straight line method to double declining balance method at any moment so the depreciation expense is adjusted accordingly.