Littlefield Company recently purchased a machine at a cost of $ 1 2,000. The machine is expected to have a residual value of $2,000 at the end of its useful life in five years. Calculate depreciation expense for all five years using the doubledeclining__balance method. The salvage value is 2,000 so that means we have $10,000 of potential depreciation. Since n = 5 years, that means we are depreciating 2*20% of whatever’s leftover each year. So in year 1, we should be depreciating $4000. Why does the book say $4800? We’re not using 40% of 12,000 because we have to factor in salvage value, right? Investopedia appears to agree with my interpretation for what it’s worth. http://www.investopedia.com/terms/d/double-declining-balance-depreciation-method.asp
For double declining balance, you calculate the annual depreciation on the beginning book value of the asset, not on its depreciable value. (If you did it based on the depreciable value, you could never depreciate it fully.) The salvage value only arises after you do the calculation: you compare the ending book value to the salvage value, and do not depreciate below the salvage value.
So, if the cost were $12,000, the salvage value $2,000, and the useful life 5 years, you would depreciate:
- $4,800 (= $12,000 × 40%) in year 1, leaving a book value of $7,200 (= $12,000 – $4,800)
- $2,880 (= $7,200 × 40%) in year 2, leaving a book value of $4,320 (= $7,200 – $2,880)
- $1,728 (= $4,320 × 40%) in year 3, leaving a book value of $2,592 (= $4,320 – $1,728)
- $592 (= $2,592 – $2,000) in year 4, leaving a book value of $2,000; the DDB depreciation of $1,037 (= $2,592 × 40%) would drop the book value below the salvage value of $2,000
- $0 in year 5