Question

On January 1, 2005 Franz Company purchased a truck that cost $22,000. The truck had an expected useful life of 5 years and a $4,000 salvage value. The amount of depreciation expense recognized in 2006 assuming that Franz uses the double declining balance method is:

Answer 1

Answer:

$5,280

Explanation:

to calculate the depreciation amount using the double declining balance method, we must use the following formula:

depreciation per year = 2 x cost of the asset x depreciation rate

cost of the asset = $22,000

depreciation rate = 1 / useful life = 1 / 5 = 20%

• depreciation for 2005 = 2 x $22,000 x 20% = $8,800
• depreciation for 2006 = 2 x ($22,000 - $8,800) x 20% = $5,280
• depreciation for 2007 = 2 x ($22,000 - $8,800 - $5,280) x 20% = $3,168
• depreciation for 2008 = $22,000 - $8,800 - $5,280 - $3,168 - $4,000 (salvage value) = $752

The double declining method is a type of accelerated depreciation, that changes the depreciation expense for every year. It is one of the three accelerated depreciation methods used by MACRS.

Answer 2

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).