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An asset is purchased for $50,000. It has an estimated useful life of eight years and salvage value of $6,000.if the asset is depreciated using the double-declining balance method,what are the depreciation expense and book value at the end of year two?

  • Math -

    The depreciation method to be used is explained here:
    http://beginnersinvest.about.com/cs/investinglessons/l/bldbldeclinebal.htm

    Using straight-line depreciation, the depreciation percentage each year would be 1/8 or 12.5%. With the double-declining-balance method (ddbm), it is 25% per year until the annual depreciation allowance is less than it would be with the straight-line method. The first-year depreciation allowance withthe d.d.b.m. is $11,000, and the book value at the end of that year is $39,000. For the second year, the depreciation allowance is (1/4)(39,000-6000) = 8250, and the book value at the end of that year is 39,000 - 8250 = 30,750. If straight-line depreciation had been used, the depreciation allowance each year would be 44,000*(1/8) = 5500. Since that is less than the double-declining balance value, the double declining balance method can be used for the second year.

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