Double-Declining Balance Method Example (Kaplan Page 60)

CFA Level I FRA
#1

Example: Calculating double-declining balance depreciation expense

Littlefield Company recently purchased a machine at a cost of $12,000. The machine is expected to have a residual value of $2,000 at the end of its useful life in five years. Calculate depreciation expensefor all five years using the double-declining balance (DDB) method.

Solution:

Year 1: (2/5)($12,000) = $4,800

Year 2: (2/5)($12,000-$4,800) = $2,880

Year 3: (2/5)($12,000-$7,680) = $1,728

Based on this, the Year 4 depreciation amount is suppose to be (2/5)($12,000-$9,408) = $1,306.80 but the LOS claim that depreciation amount was limited to $592 instead of the $1,306.80.

Why???

Anyone with simple & clear explanation?? will greatly appreciate

Thanks

Regards

#2

Salvage value of $2,000.

#3

You cannot depreciate past salvage (residual) value. Does that make sense or do you want to see the values of it?

#4

Because at year 3, the carrying value of the machine is 2592. With 592 more depreciation expense,the machine will reach at its salvage value.

#5

its clear

Many Thanks.

#6

okay cool. Good observation

Many thanks

#7

Brilliant!!!

i was confused earlier but am clear now. the trickish part is understanding the concept of total depreciation amount, carrying amount and taking cognisance of the scrap value using DDB method of depreciation.

Many thanks.

Regards

#8

@eduprisitne

Cool. Noted

Many Thanks

Regards