In Double Declining Method two times the straight line depreciation is used. It is form of accelerated form of depreciation whereas higher depreciation is charged in earlier years of life of asset similarly to accounting benefits are received from the asset.
Explanation
Double declining method depreciates the asset faster than straight line method. But it uses that is it employs figure of Net Book value in relation to the Asset to depreciate the asset rather than its cost. It would depreciate the asset twice as much as under straight line method. Although the depreciation is higher in relation to the earlier years however, the total amount and charge of depreciation pertaining to the entire the asset useful life of asset will not change at all. The double depreciation rate usually held constant and is applied in relation to the asset net book value in real-time. This depreciation approach is appropriate for below assets.
a) To get tax benefit from an asset early. As the depreciation expense will be higher in earlier years the overall net profit for those years will be lower. Which will give rise to lower tax in those years?
b) When economic benefits in relation to the initial and earlier years in relation to the asset useful life are higher in comparison to those yield in the latter useful life years. The assets like advance technological equipment will lose it value quickly as these assets have a smaller life cycle. New technology obsoletes these assets quickly as new technology is introduced in these fields very quickly.
Under GAAP (generally accepted accounting principles) expenses in relation to the specific accounting period and asset are compared to the related revenues. When an asset is purchased by a business it deducts the cost of an asset from revenue over many years rather deducting the all the cost from its revenues at once. So when economic benefit from an asset is higher in earlier year’s double declining method is used to depreciate that asset. Calculating depreciation in Double Declining Balance Depreciation can be a bit tricky as compared to the traditional technique of computing depreciation charge that is straight line method. In order to calculate the charge for depreciation by employing technique of Double Declining Balance, following formula is used and applied to the data.
Periodic Depreciation Charge
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2*R*C
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In relation to the above formula, R represents the rate of depreciation pertaining to the technique of straight line method pertaining to the computation of the periodic depreciation charge. However, C is represents the net book Value which is the computed carrying value of the very same asset at the commencement of the specific period of accounting. When accumulated depreciation is deducted from the cost of an asset we get Net book Value.
Example 1
An asset that was effectively purchased bearing date 1st July 20X1. The cost that was paid amount to $900,000, however, the residual value was assessed to be zero subsequent to the end of the asset estimated nine years useful life. Two times 10% Straight line rate would be used to compute the depreciation charge in the case of employment of the double declining method in relation to the computation of the same. Instead of the multiplying this factor to the cost, the figure of the net carrying amount at the commencement of the specific accounting period will be used. On the conclusion of the first year in relation to the asset use, the book value is standing at $900,000. Multiplication of the same value to the factor of 20% for the above cited reasons will yield the depreciation charge in relation to the first accounting period. The depreciation charge turned out to be $180,000. The book value at the conclusion of the 2nd year turned out to be $720,000 and the multiplication of the same with the constant factor that is 20% double declining rate will yield depreciation charge in relation to the second reporting period and likewise depreciation charge will be computed for each of the subsequent year.
Example 2
Ahmed Electronics Company made purchase in relation to a machine bearing catalogue price at $600,000. Estimated figures in relation to the residual value and useful life are $10,000 and five years respectively. Calculate the depreciation charge in relation to the first three years employing the technique of Double Declining Balance method.
Years
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Net Carrying Amount ($)
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Rate*
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Depreciation Charge
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Accumulated Charge
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1
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50,000
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40%
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40%*50,000=20,000
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20,000
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2
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30,000
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40%
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40%*30,000=12,000
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32,000
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3
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18,000
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40%
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40%*18,000=7,200
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39,200
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