Monday, August 17, 2009

Double Decline Method of Depreciation

The Double Declining Balance Depreciation Method is more or less a method similar to Straight Line Method but with a difference. For finding it, we first need to calculate depreciation by using Straight Line Method. We shall then figure out the total % of the asset that is depreciated in the first year and double it. That same % is multiplied by the remaining balance to be depreciated each subsequent year. The value will be lower than the Straight Line charge at some point, at which the double declining method will be scrapped and the Straight Line used for the remainder of the asset’s life.

An illustration will clarify the concept:

Suppose Tara Ltd purchased a Machinery for Rs 10,000 with a Residual value of Rs 1,000 and an Effective Life of 5 Years. We first proceed to calculate the Straight Line Depreciation Rate, which will be=100% / 5 years=20%. We need to double this rate and hence get 40% as the Double Decline Rate.For the First Year, Depreciation on the Machinery will be=40/100 x10000=4000.Therefore, Depreciated Value at the beginning of the Second Year will be= 10,000-4,000=6000.For the Second Year, Depreciation on the Machinery will be=40/100 x 6000=2400.Therefore, Depreciated Value at the beginning of the Third Year will be =6000-2400=3600.For the Third Year, Depreciation on the Machinery will be=40/100 x 3600=1440. Therefore, Depreciated Value at the beginning of the Fourth Year will be=3600-1440-=2160.For the Fourth Year, Depreciation on the Machinery will be=40/100x2160=864.Depreciated Value at the beginning of the Fifth or Last Year will be=2160-864=1296.For the Fifth/Last Year Depreciation will be the difference between the Depreciated Value and the Residual Value. Therefore, Depreciation will be=1296-1000=296.Thus the Accumulated Depreciation over the 5 years will =4000+2400+ 1440+864+296= Rs 9000.This figure plus the Residual Value of Rs 1,000 will give us the Original Value of the Machinery of Tara Ltd i.e.9000+1000=10000.The peculiar feature of Double Decline Method is that in determining the depreciation per annum, the Residual Value is not considered. Another striking feature is that the book value of the depreciated asset is never allowed to go down below the Residual Value.

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)

1 comment:

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