Question

Calculate the double-declining balance depreciation schedule for a $1,000 item that will last four years. What is the estimated salvage value?

Answer 1

Under double declining balance method, depreciation is calculated by the following formula:

Depreciation = 2 * 1 / N * (Cost - Accumulated depreciation)

where, n is the no. of years or useful life and accumulated depreciation is depreciation charged till date

For first year, accumulated depreciation will be zero.

So, depreciation for first year will be:

Depreciation for first year = 2 * 1 / 4 * ($1000 - 0)

Depreciation = 2 * 1 / 4 * $1000 = $500

Now, in the second year, accumulated depreciation will be $500 (i.e. depreciation charged till date is depreciation for first year)

Net book value remaining = Cost - Accumulated depreciation = $1000 - $500 = $500

Depreciation for second year will be:

Depreciation = 2 * 1 / 4 * ($1000 - $500) = 2 * 1 / 4 * $500 = $250

Now, in the third year, accumulated depreciation will be $750 (i.e. depreciation charged till date is depreciation for first year and second year)

Net book value remaining = Cost - Accumulated depreciation = $1000 - $750 = $250

Depreciation for third year will be:

Depreciation = 2 * 1 / 4 * ($1000 - $750) = 2 * 1 / 4 * $250 = $125

Now, in the fourth year, accumulated depreciation will be $875 (i.e. depreciation charged till date is depreciation for first year, second year and third year)

Net book value remaining = Cost - Accumulated depreciation = $1000 - $875 = $125

Depreciation for fourth year will be:

Depreciation = 2 * 1 / 4 * ($1000 - $875) = 2 * 1 / 4 * $125 = $62.5

Now, at the end of fourth year, accumulated depreciation will be $937.5 (i.e. depreciation charged till date is depreciation for first year, second year, third year and fourth year)

Estimated salvage value = Net book value remaining after 4 years

Estimated salvage value = $1000 - $937.5 = $62.5