Question

Equipment with a ten-year estimated useful life and no salvage value is sold at the end of the third year of its useful life. How would using the straight-line method of depreciation instead of the double-declining balance method of depreciation affect revenues and expenses?

Answer 1

Let me explain my solution with the help of an example. Let the value of the equipment be $10,000.

Under the straight line depreciation method the annual depreciation amount for the 10 year period will be = 10,000/10 = $1,000 per year.

Now accumulated depreciation at the end of 3rd year = 3*1000 = $3,000

Book value = 10,000 - 3,000 = 7,000

Now, in case of double-declining balance method, the rate of depreciation will be = 2*straight line rate = 2*10% = 20%

Year	Opening book value	Depreciation	Ending book value
1	10,000.00	2,000.00	8,000.00
2	8,000.00	1,600.00	6,400.00
3	6,400.00	1,280.00	5,120.00
	Total	4,880.00

Thus in case of double declining balance method the accumulated depreciation amount os $4,880 and book value = 5120.

So, if straight line method of depreciation is used then the company or the firm will recognize lower capital gain or lower capital loss in its books, when compared to double declining balance method. For example if this equipment is sold for $8,000 after 3 years then capiatl gain as per the straight line method = 8000-7000 = $1000. And in case of double declining balance method the quantum of gain = 8000-5120 = $2,880

Expenses too will be affected differently. In case of straight line method the amount of expenses will be lower than double declining balance method as in case of double declining balance method the amount of depreciation expenses will be higher during the initial years.

Thus the impact on revenue, of using straight-line method of depreciation instead of the double-declining balance method of depreciation, will be lower amount of capital gain or capital loss when the equipment is sold off after 3 years.

Impact on expenses, of using straight-line method of depreciation instead of the double-declining balance method of depreciation, will be lower expenses due to lower depreciation expenses.