Calculate the double-declining balance depreciation schedule for a $2,000 item that will last five years. What is the estimated salvage value?
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To calculate the double-declining balance depreciation schedule for an item, you need to follow a few steps:
Step 1: Determine the straight-line depreciation rate. This is calculated by dividing 100% by the useful life of the item. In this case, the item lasts for five years, so the straight-line depreciation rate would be 100% ÷ 5 = 20%.
Step 2: Determine the double-declining balance depreciation rate. This is calculated by multiplying the straight-line depreciation rate by 2. In this case, the double-declining balance depreciation rate would be 20% x 2 = 40%.
Step 3: Calculate the annual depreciation expense. This is calculated by multiplying the double-declining balance depreciation rate by the item's beginning book value. The beginning book value is typically the original cost of the item. In this case, the annual depreciation expense for Year 1 would be $2,000 x 40% = $800.
Step 4: Calculate the ending book value. This is calculated by subtracting the annual depreciation expense from the beginning book value. In this case, the ending book value for Year 1 would be $2,000 - $800 = $1,200.
Step 5: Repeat steps 3 and 4 for the remaining years until the useful life is reached. Here is a breakdown of the annual depreciation expenses and ending book values for the five years:
Year 1: Depreciation Expense = $800, Ending Book Value = $1,200
Year 2: Depreciation Expense = $480 ($1,200 x 40%), Ending Book Value = $720
Year 3: Depreciation Expense = $288 ($720 x 40%), Ending Book Value = $432
Year 4: Depreciation Expense = $173 ($432 x 40%), Ending Book Value = $259
Year 5: Depreciation Expense = $103 ($259 x 40%), Ending Book Value = $156
The estimated salvage value is the estimated value of the item at the end of its useful life. In this case, the salvage value is $156.