Question

Which method will give you a higher amount of depreciation expense in the later years of an asset's life, straight-line or declining balance? Explain

Answer 1

* The correct answer is Straight Line Method will give higher amount of depreciation expense in the later years of an asset's life.

--This is because Declining balance method provides higher depreciation expense in earlier years, which gradually decreases over the time, and in later years, the depreciation expense is quite low because of fall in book value at which depreciation is calculated.

--however, under Straight Line depreciation, the depreciation expense under each year remains the same. Hence, depreciation expense in earlier years = depreciation expense at later years.

--Example:

---Straight Line Depreciation

A	Cost	$          150,000.00
B	Residual Value	$           20,000.00
C=A - B	Depreciable base	$          130,000.00
D	Life [in years]	10
E=C/D	Annual SLM depreciation	$            13,000.00

Each year, depreciation expense will be $ 13,000

---Declining balance [double declining]

A	Cost	$          150,000.00
B	Residual Value	$            20,000.00
C=A - B	Depreciable base	$          130,000.00
D	Life [in years]	10
E=C/D	Annual SLM depreciation	$            13,000.00
F=E/C	SLM Rate	10.00%
G=F x 2	DDB Rate	20.00%

Year	Beginning Book Value	Depreciation rate	Depreciation expense	Ending Book Value
1	$           150,000.00	20.00%	$         30,000.00	$           120,000.00
2	$           120,000.00	20.00%	$         24,000.00	$             96,000.00
3	$              96,000.00	20.00%	$         19,200.00	$             76,800.00
4	$              76,800.00	20.00%	$         15,360.00	$             61,440.00
5	$              61,440.00	20.00%	$         12,288.00	$             49,152.00
6	$              49,152.00	20.00%	$            9,830.40	$             39,321.60
7	$              39,321.60	20.00%	$            7,864.32	$             31,457.28
8	$              31,457.28	20.00%	$            6,291.46	$             25,165.82

As you can see, Depreciation expense is “decreasing” each year under Declining balance method.