Answer: The amount of depreciation expense recognized in 2006, using the double declining balance method is $5,280.
And the journal entries required are:
Debit Depreciation expense $5,280
Credit Accumulated depreciation $5,280
Explanation: The double-declining method is otherwise known as reducing balance method. It is usually derived by using the formula below:
Double-declining depreciation = 2 X SLDP X BV
Where SLDP = straight-line depreciation percentage
BV = Book value of the asset (Cost minus depreciation)
So using the straight-line depreciation method, we need to remove the salvage value from the cost and then divided by 5 years. That is, ($22,000 - $4,000) / 5 years = $3,060 yearly depreciation expense.
However, under the double-declining method, we need to divide the 100% by the useful life of the asset first to get the SLDP then multiply by 2, that is, 100%/5 years = 20% x 2 = 40%.
So 40% x $22,000 in year 1 (December 31, 2005) is $8,800
In year 2 (December 31, 2006), 40% x $13,200 ($22,000 - $8,800) = $5,280 and so on. The depreciation expense would stop immediately it falls below the salvage value of $4,000.
So the book value of the asset at the end of year 2 is $7,920 ($13,200 - $4,000 accumulated depreciation).
= New Forecast
= Previous period's forecast.
= Smoothing Constant
= Previous period's Actual Demand.