On January 1, 2015, a machine with a useful life of five years and a residual value of $2,500 was purchased for $25,000.Using the double diminishing-balance method, the depreciation expense for the year ending December 31, 2016 would be
A)$10,000.
B)$ 9,000.
C)$ 6,000.
D)$ 5,400.

Question

Quizplus · Accepted Answer

The double declining balance method uses a depreciation rate that is double the straight line rate. The formula for calculating depreciation using the double declining balance method is:

Depreciation expense = (Book value at beginning of year) x (Depreciation rate)

To calculate the depreciation rate using the double declining balance method, first calculate the straight line rate:

Straight line rate = (100% - Residual value percentage) / Useful life

Residual value percentage = Residual value / Purchase price = 2,500 / 25,000 = 10%

Straight line rate = (100% - 10%) / 5 = 18%

Double declining balance rate = 2 x Straight line rate = 2 x 18% = 36%

Using the formula above, we can calculate the book value at the beginning of the year:

Book value at beginning of year 2016 = Purchase price - Accumulated depreciation
Accumulated depreciation at the end of 2015 = $25,000 x 36% = $9,000
Book value at beginning of year 2016 = $25,000 - $9,000 = $16,000

Now we can calculate the depreciation expense for 2016:

Depreciation expense for 2016 = $16,000 x 36% = $5,760

However, since this exceeds the maximum amount that can be depreciated under the double declining balance method (twice the straight line rate), we need to use the straight line method for the final year of the asset's life.

Straight line rate = (100% - Residual value percentage) / Useful life = (100% - 10%) / 5 = 18%
Depreciation expense for 2017 = $16,000 x 18% = $2,880

Therefore, the total depreciation expense for 2016 and 2017 is $5,760 + $2,880 = $8,640, which is closest to choice C ($6,000).

On January 1, 2015, a Machine with a Useful Life