Question

A company purchased a delivery truck on January 1, 2021, for $100,000. The truck has an estimated life of 10 years and an estimated residual value of $10,000. If the company uses double-declining balance, what would be the book value of the truck after two years?

Answer 1

Answer: The book value of the truck after two years, using the double-declining balance is $64,000.

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 10 years. That is, ($100,000 - $10,000) / 10 years = $9,000 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%/10 years = 10% x 2 = 20%.

So 20% x $100,000 in year 1 (December 31, 2021) is $20,000

In year 2 (December 31, 2022), 20% x $80,000 ($100,000 - $20,000) = $16,000 and so on. The depreciation charge would stop immediately it falls below the salvage value of $10,000.

So the book value of the asset at year 2 is $64,000 ($100,000 - $36,000 accumulated depreciation)