Question

A building is acquired on January 1, at a cost of $980,000 with an estimated useful life of 10 years and salvage value of $88,200. Compute depreciation expense for the first three years using the double-declining-balance method.

Answer 1

Answer:

Year 1 = $196,000

Year 2= $156,800

Year 3= $125,440

Explanation:

Double-declining-balance rate = 100% / 10 years x 2 = 20%. Computation of annual depreciation expense are as follows;

Year 1

$980,000 x 20 % = $196,000

Net book value

$980,000 - $196,000 = $784,000 (to be used as base for year 2)

Year 2

$784,000 x 20% = $156,800

Net book value

$784,000 - 156,800 = $627,200

Year 3

$627,200 x 20% = $125,440

Net book value

$627,200 - $125,440 = $501,760

*Salvage value is ignored in computing the yearly depreciation expense under double-declining-balance method. The reason of it is that, it will take longer to depreciate an asset compare to it’s useful life if we deduct salvage value from original cost in depreciating an asset.