Depreciation is the process of allocating the cost of a long-term plant asset to expense over its useful life.
We allocate asset cost to expense with the following adjusting journal entry.
We debit Depreciation Expense and we credit Accumulated Depreciation for the amount of expense.
In this video, let’s learn how to calculate depreciation expense with the double-declining balance method.
In order to calculate depreciation expense, we need three values.
One is a known amount, asset cost, and the other two are estimated; residual value and useful life.
The formula for the double-declining balance method is quite a bit different than the other methods.
It is 1 divided by the useful life in years times 200% (or 2).
This gives us our depreciation expense rate.
Then we multiply the depreciation rate times the book value of an asset.
Notice that we did not deduct residual value anywhere in this formula.
That resultsequals the amount of annual depreciation expense that we would record in our adjusting journal entry.
So let’s look at an example. On January 1, The Pixies purchase a touring bus for an upcoming concert tour.
The bus cost $250,000 and has an estimated useful life of 5 years.
At the end of the 5 years, it is estimated that the bus will have a value of $50,000.
Using the double-declining balance method,
let's calculate the amount of depreciation expense and the asset's book value at year end.
Before we do the calculation, let’s look at the book value of this asset before any depreciation has been taken.
The book value when as asset is acquired is its cost.
In this example, the book value is $250,000.
Okay, again, the formula is 1 divided by the useful life in years times 200%.
This will give us are depreciation expense rate.
We're then gonna multiply that rate by the book value of the asset.
So 1 divided by 5 times 200% = 40%.
40% X $250,000 = $100,000 of annual depreciation expense.
We can record the adjusting journal entry by debiting Depreciation Expense and crediting Accumulated Depreciation for $100,000.
The book value is the cost of the asset minus its accumulated depreciation.
So cost of $250,000 minus accumulated depreciation of $100,000 gives us a net book value of $150,000.
Let’s look at the amount of depreciation expense for year two.
The formula is the same so the depreciation rate is still 40%
but the book value has changed from $250,000 to $150,000.
So, 40% X $150,000 = $60,000 of annual depreciation expense.
We can record the adjusting journal entry by debiting Depreciation Expense and crediting Accumulated Depreciation for $60,000.
The book value is the cost of the asset minus its accumulated depreciation.
So cost of $250,000 minus accumulated depreciation of $160,000 gives us net book value of $90,000.
The final concept related to double-declining balance depreciation is partial year depreciation.
When assets are placed in service on dates other than the first of the year,
we need to adjust how much depreciation we record for the first year.
So let’s look at our previous example only let’s change the acquisition date.
On July 1, The Pixies purchase a touring bus for an upcoming concert tour. The bus cost $250,000
and has estimated useful life of five years.
At the end of 5 years, we estimate that the bus will have a value of $50,000.
Using the double-declining balance method, we get a depreciation rate of 40%.
This rate doesn’t change based on when the asset was acquired.
So 40% times the book value of $250,000 is annual deprecation of $100,000.
Except The Pixies didn’t have the bus for the full year.That had it for half the year.
So let’s multiply the annual depreciation of $100,000 by 6/12th to get $50,000 for year one.
We can record the adjusting entry by debiting Depreciation Expense and crediting Accumulated Depreciation for $50,000.
Finally, the book value is the cost of $250,000
minus the accumulated depreciation of $50,000, gives us a net book value of $200,000.