Alright. So let's learn a trickier depreciation method, the double declining balance method. So remember when we're talking about depreciation, we're talking about buying a fixed asset, something that we're going to use for a long time and something that we're probably going to spend a lot of money on and we want to break up that cost over the useful life of that asset. We're going to use it for multiple years, but we want that cost to be split up over those years. So, whenever we calculate depreciation, regardless of what method we're using, we're going to focus on 3 variables here, okay? The three variables we need to know are the cost, how much did we spend on the asset, right? And they're generally just going to give you these numbers in every problem. They'll tell you the cost and then they're going to estimate a useful life. This is how long the company expects the asset to help generate revenue, right? How long are they going to be able to use this asset and the residual value that's how much the company expects the asset to be worth after they're done using it, right? The residual value after they're done. So remember that these two, the useful life, and the residual value, these are both estimated, okay? These have to be estimated by the company. They're not going to be, you can't know ahead of time, right? You buy a truck, you can't really know how long the truck's going to last you. Is it going to last you 5 years? 10 years? Who knows? Right? So you have to make your best guess. And remember that residual value is sometimes called salvage value or scrap value, right? There are different names and different ways to interpret that residual value. So we're going to be focusing on the declining balance method in this video. There are different types of declining balance, but in your class we just focus on the double declining balance and that's the most common declining balance method. Okay? The declining balance method is an accelerated depreciation method. So remember, regardless of what method you use, you're going to take the same amount of depreciation, right? There's going to be some depreciable base, some amount of assets value that you're going to depreciate. So it's just a matter of how you split up that depreciation and that's what the methods are going to split up differently. The declining balance is going to accelerate depreciation, and what that means is that it's going to front load it. In the first few years, we're going to take more depreciation and then in the last few years, we'll take less depreciation, Okay? More depreciation is taken in the early years and what is the benefit to that? Why do we want to take more depreciation in the early years? Remember, depreciation is an expense and it's going to lower our income, right? If we have higher expenses, well higher expenses lead to lower income in the early years. And when we have lower income, well, that means we pay less taxes. Okay? So the benefit of using this type of method is that it allows us to pay less taxes. And usually when we do depreciation for the IRS, for our tax purposes, we're going to use some sort of accelerated method. Okay? And you deal with that more in later classes how this deals with taxes and all that. But for now, we're going to focus on just how we calculate it. Okay? So, like I said, we're going to focus, there's different types of declining balance, but we're focused on the double declining balance, which abbreviates to the DDB. Double declining balance method. Okay? So let's go through the steps. The steps for calculating double declining balance depreciation and then we'll do an example. Okay? So the first step we want to do is we want to calculate the double declining balance depreciation rate. Okay? This isn't the amount of depreciation. This is a rate of the value that we're going to depreciate each year, okay? So we're going to use this same rate every year. And this is not the depreciation expense, right? So before when we had our straight line depreciation, well we calculated the depreciation expense right away. Okay? Here, we're just calculating a rate. And what that is? It's 1 divided by the useful life. So we're going to use the useful life here and then we multiply it by, oops, by 2. That multiplying it by 2, that's the double declining balance. Okay? That's why we're doing the double declining balance is by multiplying it by 2 here. If we were saying to do the triple declining balance or something like that, that would be a multiple of 3, in that case. But we're going to focus on double declining balance and we multiply by 2. So this gives us a rate. So let's say that it was a 10 year useful life, well then it would be \( \frac{1}{10} \times 2 \) and that \( 0.1 \times 2 \). So our rate would be 0.2, okay? That would be our double declining balance rate would be 0.2 per year. Okay? So that's just an example there if we had a 10 year useful life. Actually, I'll leave that in there. Oh, it's gone now. So, alright. So that's how we do our depreciation rate. Let's go on to step 2. And that's pretty easy, right? We just take our useful life, 1 over the useful life, multiply by 2. So in step 2, we multiply what we found in step 1, the depreciation rate by the beginning net book value. So remember, this net book value, it's going to be decreasing each year, okay? So the beginning net book value and the depreciation rate, this is our depreciation expense. Okay. This is the depreciation expense right here. So once we do that, we're going to calculate the beginning value minus the depreciation expense. This is the new net book value and this is important because each year we're going to be using that new net book value That's going to be the new beginning value that we've that we multiply by the depreciation rate. So this will start making sense, once we get into an example. But these are the steps that we follow. And we're going to keep repeating this process, okay? So once we find our depreciation rate and our beginning value, our beginning net book value, we're just going to keep multiplying, get the depreciation expense for the next year, find the new net book value, multiply by the rate all the way until we get to the final year, okay? So in the final year, this is going to be a plug. This is what we call a plug, okay? Because notice at no point are we using our residual value. We're taking the full value of the asset and are going to start multiplying. We're not taking away the residual value at the beginning. This is an important difference with the double declining balance method. We're not going to remember with the straight line method, we took out the residual value before we started calculating depreciation expense. In this case, we don't do that. What we do is in the final year, we're like, well, how much depreciation do we have to take to get us to our residual value? So we figure that out in the last year and then we're left with our residual value in the last year. Cool? So this sounds a little tricky. And this is kind of tricky. This is the trickiest depreciation method that you're going to deal with. So why don't we pause here and then we'll do an example where you can follow through how we use these steps in the double declining balance method. All right? Let's do that now.
Depreciation: Declining Balance: Study with Video Lessons, Practice Problems & Examples
Created using AIThe double declining balance (DDB) method is an accelerated depreciation technique used to allocate the cost of a fixed asset over its useful life. To calculate the DDB rate, use the formula: , where
Double Declining Balance (DDB) Depreciation
Video transcript
Double Declining Balance (DDB) Depreciation
Video transcript
Alright. Let's try this example together. On January 1st, year 1, Johnson and Johnson and Johnson Company purchased a delivery truck for $42,000. The company estimated a useful life of 5 years and a residual value of $2,000. What would be the entry to record depreciation when preparing the December 31st, year 1 financial statements, and the net book value on that date, alright? So what I am going to do is I am going to go through the entire useful life of the asset, so you can see how this double declining balance method works throughout the whole useful life. I've got a little table here, unfortunately, on your test, you're probably not going to get a table with all of these data already prepared for you. You're going to have to remember how to use the method and calculate. But the benefit is that you're usually not going to have to calculate an entire useful life like we're going to do here. I am doing this so you can see the whole scope of the double declining balance method, but usually they are just going to ask you in the 1st year or the 2nd year what that double declining balance depreciation is going to be. Cool? So let's go ahead and get started. Our cost here was $42,000, right? They tell us in the problem we had a cost of $42,000, an estimated residual value of $2,000, and an estimated useful life of 5 years, right? A 5-year useful life. So with this information, we are ready to calculate depreciation. This is all the information you ever need for depreciation problems. So on January 1st, year 1, we have our beginning net book value, right? Our beginning net book value is our $42,000, right? Because we have taken no depreciation. So our book value is the $42,000. We take no depreciation expense at this point, there's no accumulated depreciation, so our ending book value is still $42,000. Remember that net book value is our cost minus our accumulated depreciation. So by December 31st, year 1, we are going to start with that $42,000 book value, but now we need to calculate depreciation. So now that we are calculating depreciation with the double declining balance method, our step 1 was to get that depreciation rate, right? So our rate, we will do it up here. The rate is equal to 1 divided by the useful life, which was 5 in this case, times 2. We are going to multiply by 2 because it's the double declining balance method, so 1 5 × 2, that comes out to 0.4, right? So sometimes you see it as a percentage, and they'll say the rate is 40 percent. I leave it as a decimal because we're going to be multiplying, and it's just easier to use decimals. So our rate is going to be 0.4 and that's going to be the same every year. We are always going to stay to the 0.4 rate, but what we are going to see changing is that beginning net book value that we calculate against. So the next step is to multiply our depreciation expense, right? Step 2 is to multiply the rate times the beginning net book value, and in the 1st year, it's always easy because it's just the cost times the rate, and what does that give us? $42,000 × 0.4 and that's $16,800. So notice how much depreciation we are taking in the 1st year, right? We're taking quite a big chunk of depreciation because we are taking basically 40 percent of the asset's worth, we are taking it as depreciation in the 1st year, okay? So if our depreciation expense right there is $16,800, well, we hadn't taken any depreciation before, so it was just 0 plus the $16,800 giving us accumulated depreciation of $16,800, right? So what's going to be our ending net book value? Well, we have to take out that accumulated depreciation, so it's always going to be like this, right? $42,000 minus the $16,800. So our ending net book value is going to be $42,000 minus the accumulated depreciation of $16,800, which gives us $25,200, right? So that's our new book value that we are going to use in the next year, okay? So $42,000 minus the accumulated depreciation gets us to our new ending net book value, and that's what we are going to put right here for the next year: $25,200, right? We took this number $25,200, and we put it in year 2. Let me go ahead and get out of the way because I see my head peeking into that year 2. And our double declining balance rate, well, it's the same every year, right? We are always going to use 0.4. We calculated that at the beginning. So 0.4 times our beginning net book value is $25,200 × 0.4. That's going to give us our next year's depreciation. $25,200 × 0.4 that comes out to $10,080. $10,080 is our depreciation expense in the 2nd year. And remember, our entry is always the same for depreciation expense. We're going to debit depreciation expense and credit accumulated depreciation for the same amount. So now we have accumulated, in the 1st year, we had $16,800 of depreciation plus this year's depreciation of whoops, $10,080. Well, our new accumulated depreciation is $26,880, right? That is our total accumulated depreciation at this point. So what's going to be our ending net book value? Well, that's the cost, right? $42,000 minus $26,880, and our ending net book value is $15,120. Okay? So notice, notice how it's a little more complicated here, right? Because we have to keep track of that ending net book value, and that's going to be our beginning net book value in the next period. So $15,120, that is our beginning net book value. What's going to be our double declining balance rate? Well, it doesn't change, right? 0.4 again. So 0.4 × that $15,120, that gives us depreciation in this year. Year 3 is going to be $6,048 of depreciation, right? That's $15,120 × 0.4. So what's our new accumulated depreciation? Well, that's the $26,880 from the previous year plus our additional depreciation of $6,048. And what's that get us to? Now our total accumulated depreciation is $32,928. Pretty complicated stuff here, right? Well, it's just a bunch of arithmetic. So once you get the pattern going, well, it's not so crazy. So $32,928 in accumulated depreciation. So what does that tell us about our ending net book value? We've got our $42,000 in cost minus $32,928, which gives us a net book value of $9,072, right? $9,072 at the end of year 3, and that's going to be our beginning balance for year 4, $9,072. Our double declining balance rate hasn't changed, and we are going to multiply it by 2. $9,072 × 0.4 that gives us our depreciation for the next year. And if you'll notice when you do $9,072 × 0.4, well, we get a decimal now. We got $3,628.8. And this happens a lot with the Double Declining Balance Rate because you can't expect these numbers to stay pretty forever, right? So what we are going to do is we are going to start rounding. I'm going to round to the nearest dollar, and I am going to go $3,629. $3,629 is going to be our depreciation that year, just to keep the numbers a little prettier there. And let's find out our new accumulated depreciation, $3,629 plus $32,928. And what's that give us? $33,629 plus $32,928. Now, our total depreciation is $36,557. Alright. So one more step and the worst is behind us. $42,000, let's find our ending net book value here. $42,000 minus our accumulated depreciation of $36,557. That gives us our net book value of $5,443. Alright. So now we've reached the final year. Remember, in the final year, we do something a little different. We're not going to keep doing our double declining rate. What we want to do in the final year is get to our residual value, right? Because once we're done depreciating, we should have our residual value left. So we're starting this year with a value of $5,443, right? But we want to end with a residual value. What was it in the problem? It was $2,000. So our depreciation expense in the final year should be some amount that gets us from our beginning net book value to a value of $2,000. So how much depreciation expense would that be? Well, we just need to subtract the 2, right? $5,443 minus a value of $2,000. Well, that means we need to take, and I'm going to do this in a different color, $3,443 in depreciation to get us to our ending net book value, right? Because now, look at our accumulated depreciation. Look what happens here. $36,557 plus, and I'll do it in blue, $3,443. Well, that's going to equal, when you add those together, guess what? $40,000. And remember that $40,000 is our depreciable base, right? We had $42,000 in cost. Remember, the depreciable base is always the total amount of depreciation you're going to take. $42,000 in cost minus $2,000 in residual value. Well, that's $40,000 and that's exactly how much depreciation we have taken over the 5 years. And that's what I meant when I said that in year 5, it's a plug, right? We're just plugging in the number that gets us to the correct residual value at the end. So our net ending net book value is the $42,000 minus $40,000 in accumulated depreciation, and there you have it, $2,000 as our ending net book value, which is our residual value. So let's say the truck keeps working and now it's year 6, and we are still using the truck. Well, the beginning net book value is $2,00
ABC Company purchased a new machine on January 1, Year 1 for $44,000. The company expects the machine to last ten years. The company thinks it could sell the scrap metal from the machine for $4,000 at the end of its useful life. If the company uses the double-declining method for depreciation, what will be the net book value of the machine on December 31, Year 2?
DBQ Company purchased a machine on January 1, Year 1 for $60,000. The company estimated a five year useful life and $8,000 residual value. If the company uses the double-declining-balance method for depreciation, what will be the amount of accumulated depreciation on December 31, Year 2?
XYZ Company purchased a machine on January 1, 2018 for $120,000. The company estimated a four year useful life and $4,000 residual value. If the company uses the double-declining-balance method for depreciation, what will be the amount of depreciation expense for the year 2021?
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What is the double declining balance method of depreciation?
The double declining balance (DDB) method is an accelerated depreciation technique used to allocate the cost of a fixed asset over its useful life. Unlike the straight-line method, which spreads the cost evenly, DDB front-loads the depreciation expense, resulting in higher expenses in the early years and lower expenses in the later years. The formula to calculate the DDB rate is , where n is the estimated useful life of the asset. This method helps reduce taxable income and taxes owed in the initial years of the asset's life.
Created using AIHow do you calculate the double declining balance depreciation rate?
To calculate the double declining balance (DDB) depreciation rate, you use the formula: , where n is the estimated useful life of the asset. For example, if the useful life of an asset is 10 years, the calculation would be , resulting in a DDB rate of 0.2 or 20%. This rate is then applied to the asset's beginning net book value each year to determine the annual depreciation expense.
Created using AIWhat are the benefits of using the double declining balance method?
The double declining balance (DDB) method offers several benefits. Firstly, it results in higher depreciation expenses in the early years of an asset's life, which reduces taxable income and, consequently, taxes owed during those years. This can be advantageous for companies looking to defer tax payments. Secondly, it better matches the expense with the asset's usage, as many assets lose value more quickly in their early years. Lastly, it can improve cash flow in the initial years by lowering tax liabilities, allowing businesses to reinvest the saved funds into other areas.
Created using AIHow does the double declining balance method differ from the straight-line method?
The double declining balance (DDB) method differs from the straight-line method in how it allocates depreciation expenses over an asset's useful life. The straight-line method spreads the cost evenly across each year, resulting in equal annual depreciation expenses. In contrast, the DDB method front-loads the depreciation, resulting in higher expenses in the early years and lower expenses in the later years. This accelerated depreciation approach can reduce taxable income more significantly in the initial years, offering potential tax benefits. Additionally, the DDB method does not subtract the residual value at the beginning, unlike the straight-line method.
Created using AIWhat is the formula for calculating depreciation expense using the double declining balance method?
The formula for calculating depreciation expense using the double declining balance (DDB) method involves two main steps. First, calculate the DDB rate using the formula: , where n is the asset's useful life. Second, apply this rate to the asset's beginning net book value each year. The depreciation expense for a given year is calculated as: . This process is repeated annually, adjusting the net book value each year until the residual value is reached.
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