Hi fellow candidtes, in question 16 of reading 25, the answer says the double declining depreciation is twice the rate of what the straight line depreciation would be… (which is actually asked on question 15). Wouldn’t the rate be 55,000/600,000 = 9.1% x 2 = 18.2%? Looks like for straight depreciation in this case they do not substract the salvage value - is that the way it should be calculated for accelerated depreciation then?
Thanks!
I thought the same. It turns out, however, that for accelerated depreciation you do not subtract salvage value. Instead, you first calculate what the straight line depreciation rate would be (say 15%), and then apply the “acceleration” factor (say 2.0) to get the periodic depreciation expense (0.15 * 2.0 * BV). You apply this every period to the net book value of the asset. You stop depreciating once book value hits salvage, however. In straight line, you subtract salvage from cost and divide by life of the asset (e.g. in years), and then expense the same amount of depreciation each period until book value hits 0. Does this make sense?
I’m glad I asked this - thanks for the explanation!