1. © 2014 Cengage Learning. All Rights Reserved. Learning Objective © 2014 Cengage Learning. All Rights Reserved. LO11Calculate depreciation using the double declining-balance method.

2. © 2014 Cengage Learning. All Rights Reserved. Calculating Depreciation Using the Double Declining-Balance Method ●Any method of depreciation that records greater depreciation expense in the early years and less depreciation expense in the later years is called accelerated depreciation. ●The declining-balance method of depreciation is a type of accelerated depreciation that multiplies the book value of an asset by a constant depreciation rate to determine annual depreciation. ●A declining-balance rate that is two times the straight- line rate is called the double declining-balance method of depreciation. SLIDE 2 LO11 Lesson 19-5

3. © 2014 Cengage Learning. All Rights Reserved. Calculating Depreciation Using the Double Declining-Balance Method SLIDE 3 LO11 20%×2=40% 100%÷5=20% Estimated Depreciation Expense ÷ Years of Estimated Useful Life = Straight-Line Rate of Depreciation ×Multiply by Two= Double Declining-Balance Rate of Depreciation Lesson 19-5

4. © 2014 Cengage Learning. All Rights Reserved. Year Beginning Book Value Declining- Balance Rate Annual Depreciation Ending Book Value 1$30,000.0040%$12,000.00$18,000.00 218,000.0040%7,200.0010,800.00 Calculating Depreciation Using the Double Declining-Balance Method SLIDE 4 LO11 4 4 Transfer the book value to the following year. Plant Asset: Automobile Original Cost: $30,000.00 Depreciation Method: Double Declining-Balance Estimated Salvage Value: $2,500.00 Estimated Useful Life: 5 years 1 1 Calculate rate. 2 2 Determine the annual depreciation expense. 3 3 Determine the ending book value. Lesson 19-5

5. © 2014 Cengage Learning. All Rights Reserved. Year Beginning Book Value Declining- Balance Rate Annual Depreciation Ending Book Value 1$30,000.0040%$12,000.00$18,000.00 218,000.0040%7,200.0010,800.00 3 40%4,320.006,480.00 4 40%2,592.003,888.00 5 —1,388.002,500.00 Total Depreciation$27,500.00 Calculating Depreciation Expense in the Final Year SLIDE 5 LO11 Plant Asset: Automobile Original Cost: $30,000.00 Depreciation Method: Double Declining-Balance Estimated Salvage Value: $2,500.00 Estimated Useful Life: 5 years 1 1 Transfer the book value. 2 2 Determine the last year’s depreciation. 3 3 Verify the ending book value. Lesson 19-5

6. © 2014 Cengage Learning. All Rights Reserved. Accelerated Depreciation Methods ●The double declining-balance method of depreciation is one method of accelerated depreciation. ●All accelerated methods have one thing in common— more depreciation is charged in the first year than in the later years. ●GAAP allows each business to choose either straight-line or accelerated depreciation for financial reporting. ●But, once chosen, the business should use the same method from year to year. SLIDE 6 LO11 Lesson 19-5

7. © 2014 Cengage Learning. All Rights Reserved. Modified Accelerated Cost Recovery System (MACRS) ●The U.S. Internal Revenue Service has published rules that must be applied when calculating the amount of depreciation expense that is used to compute a business’s federal income tax obligation. ●Those rules are called the Modified Accelerated Cost Recovery System (MACRS). ●MACRS is an accelerated depreciation method. SLIDE 7 LO11 Lesson 19-5

8. © 2014 Cengage Learning. All Rights Reserved. Straight-Line Method Double Declining-Balance Method Year Beginning Book Value Annual Depreciation Ending Book Value Beginning Book Value Annual Depreciation Ending Book Value 1 $6,000.00$1,100.00$4,900.00$6,000.00$2,400.00$3,600.00 2 4,900.001,100.003,800.003,600.001,440.002,160.00 3 3,800.001,100.002,700.002,160.00864.001,296.00 4 2,700.001,100.001,600.001,296.00518.40777.60 5 1,600.001,100.00500.00777.6277.60500.00 Total Depreciation5,500.00 Comparing Two Methods of Depreciation SLIDE 8 LO11 Plant Asset: Automobile Original Cost: $6,000.00 Depreciation Method: Comparison of Two MethodsEstimated Salvage Value: $500.00 Estimated Useful Life: 5 years Lesson 19-5

9. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-5 Audit Your Understanding 1.When calculating depreciation expense using the declining-balance method, what number stays constant each fiscal period? SLIDE 9 ANSWER Depreciation rate Lesson 19-5

10. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-5 Audit Your Understanding 2.What is the declining-balance method that uses twice the straight-line rate? SLIDE 10 ANSWER Double declining-balance method Lesson 19-5

11. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-5 Audit Your Understanding 3.What change occurs in the annual depreciation expense calculated using the declining-balance method? SLIDE 11 ANSWER Depreciation expense declines each year Lesson 19-5

12. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-5 Audit Your Understanding 4.An asset is never depreciated below what amount? SLIDE 12 ANSWER Its estimated salvage value Lesson 19-5