Double Declining Balance Depreciation Expense example essay topic

Balls and Bats, Inc. purchased equipment on January 1, 2005, at a cost of $100,000. The estimated useful life is 4 years with a salvage value of $10,000. For this assignment you are to complete the following tasks: o Prepare two different depreciation schedules for the equipment - one using the double-declining balance method, and the other using the straight-line method. (Round to the nearest dollar). o Determine which method would result in the greatest net income for the year ending December 31, 2005. o How would taxes affect management's choice between these two methods for the financial statements? 1. Straight-line Method Depreciation expense = Acquisition cost - residual value Estimated useful life in years Depreciation expense per year 22,500 = 100,000 - 10,000 = 90,000 4 4 Straight Line Depreciation Yrs of the asset's life Depreciation Expense (income statement) Accumulated depreciation (balance sheet at end of the year) Book value of the asset (balance sheet at end of the year) 1 22,500 22,500 77, 5002 22,500 45,000 55,0003 22,500 67,500 32, 5004 22,500 90,000 10,0002.

Double-Declining Balance Depreciation Depreciation expense = existing book value X (2/estimated useful life of years) 100,000 x 2/4 = 50,000 Double-Declining Balance Depreciation Yrs of the asset's life Depreciation Rate = 50% Book value before depreciating the asset for the year Depreciation expense for the year Accumulated depreciation (at the end of the year) 1 0.5 100,000 50,000 50,0002 0.5 50,000 25,000 75,0003 0.5 25, 00 12,500 87, 5004 0.5 12.5 2.5 90,000 Using straight line deprecation of 1 year means that 22,500 (1 22,500) has been added to the accumulated deprecation. The cost of the assets $100,000 minus $22,500, equal the book value at the end of December 31, 2005, of $77,500. Using the double declining method deprecation of 1 year means that 2/4 and multiply it by each year by the book value $100,000 2/4 = $50,000. $100,000-50,000 = $50,000 this will be the book value at the end of December 31, 2005. The Straight Line Method would result in the greatest income for the year ending in December 31, 2005. The Straight Line Method does not depreciate as aggressively as the Double Declining Method.

It's more of an even depreciation amount over a period of time making the net income more. The Double Declining Balance doubles the amount of expenses to be taxed, making the net income less than if you were using the Straight Line Method. In the Double Declining Balance Method, tax will be benefited as its overall depreciation for 4 yrs is more than the Straight Line Method. Reference: Reimer's, J. (2003). Financial Accounting a business process approach. (pp. 86-94). Upper Saddle River, New Jersey.