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Cost of asset = 1,00,000
Estimated residual value = 10,000
Estimated useful life of asset = 5 years
Find the book value at the end of 2nd year using double declining balance method.
a. 24000
b. 36000
c. 40000
d. 64000
Ans - b
Explanation
Depreciation rate = (1/useful life) x 200%
= 1/5 x 200% = 20% x 2 = 40%
(*) depreciation stops when book value = residual value
[Year 1]
Depreciation amount for year 1
= beginning book value x depreciation rate
= 1,00,000 x 40% = 40,000
Accumulated depreciation at the end of year 1 = 40,000
Book value at the end of year 1
= 1,00,000 - 40,000 = 60,000
[Year 2]
Depreciation amount for year 2
= beginning book value x depreciation rate
= 60,000 x 40% = 24,000
Accumulated depreciation at the end of year 2
= 40,000 + 24,000 = 64,000
Book value at the end of year 2
= 1,00,000 - 64,000 = 36,000
[Year 3]
Depreciation amount for year 3
= beginning book value x depreciation rate
= 36,000 x 40% = 14,400
Accumulated depreciation at the end of year 3
= 40,000 + 24,000 + 14,400 = 78,400
Book value at the end of year 3
= 1,00,000 - 78,400 = 21,600
[Year 4]
Depreciation amount for year 4
= beginning book value x depreciation rate
= 21,600 x 40% = 8,640
Accumulated depreciation at the end of year 4
= 40,000 + 24,000 + 14,000 + 8,640 = 87,040
Book value at the end of year 4
= 1,00,000 - 87,040 = 12,960
[Year 5]
Depreciation amount for year 5
= beginning book value x depreciation rate
= 12,960 x 40% = 5,184
[NOTE]
For year 5, depreciation amount will not be 5,184.
If 5,184 is depreciated,
--> book value = 12,960 - 5,184 = 7,776
--> book value < residual value
Depreciation stops when book value = residual value
--> depreciation amount for year 5 = 2,960
--> book value = 12,960 - 2,960 = $10,000
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