AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 1 Property-Plant-Equipment: Module 5 Slide 1 Hi everyone. Let’s continue our discussion of depreciation. Now we’ve seen the straight-line method.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 2 Slide 2 Let’s talk about the second depreciation method, known as the double declining balance method. Double declining balance is known as an accelerated depreciation method. Now in order to understand what this means remember back to how straight-line worked. Straight-line recorded the exact amount of depreciation year after year after year. It was an equal using up over time. An accelerated depreciation method, such as double declining balance, records more depreciation in the early years of the asset’s life and less depreciation in the later years. Thus for the accelerated method, such as double declining balance, you will see a declining amount of depreciation over time, whereas with straight-line depreciation it is the exact same expense recorded year after year after year.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 3 Slide 3 Now let’s talk a little bit about double declining balance depreciation. Now we already know it’s an accelerated method. That means we will see a decreasing amount of depreciation over time. The method assumes the asset is used more in the early years and less in the later years. That is why more expense is recorded in the early years and less expense in the later years. The depreciation expense is calculated or is based on this declining book value of the asset. Now we’ve already learned that the book value of the asset is the cost of the asset minus its accumulated depreciation. To calculate your double declining balance depreciation, take the beginning of year book value—whatever the book value of the asset is at the beginning of the year—and multiply that by a fraction. And the fraction would be two over the asset’s life. So beginning of year book value multiplied by two over the life of the asset.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 4 Please note that that fraction (two over the asset’s life) remains constant in all years. It is the book value of the asset that decreases from one year to the next as we add more and more depreciation to what has been accumulated. So it’s the declining book value that will give us the decreasing effect in terms of reduced expense in every year. The fraction two over the life, constant in all years.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 5 Slide 4 To calculate our double declining balance depreciation we already know, we take the beginning of year book value of the asset multiplied by two over the asset’s life. Key thing to make note of. The book value of the asset at the beginning of the very first year is simply equal to its cost. Remember, book value is cost minus accumulated depreciation. At the beginning of the very first year, nothing has been depreciated. No depreciation has been recorded on the asset. So at the beginning of the first year your accumulated depreciation is zero. So at the beginning of the first year the book value of the asset is cost minus zero or simply the cost of the asset. In all future years the book value is simply the difference between the cost of the asset and all depreciation recorded up to that point in time. One final critical thing about double declining balance depreciation. The residual value is ignored in the calculation. In your calculation you do notAMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 6 include the residual value in determining double declining balance depreciation.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 7 Slide 5 Now that we know how double declining balance works, let’s see if we can put it to test and go back to example number three from our website problems, dealing with Nick’s Nature Trails. Remember, Nick’s Nature Trails purchased a truck on January 1st of 2001. The cost of the truck was $38,000. The residual value was 4,000 and it had a four-year life. And it wants to calculate the depreciation expense for each of those four years and the book value of the truck at the end of each of those four years. And we’re up to the double declining balance method. And we remember that depreciation expense under double declining balance is the book value at the beginning of the year multiplied by two over the life. And at the beginning of the first year the accumulated depreciation is zero. Hence the book value is equal to the asset’s cost (38,000-0) multiplied by the fraction of two over the asset’s life in this example, four years. Depreciation expense recorded in the first year, 2001, is $19,000.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 8 To come up with the book value at the end of 2001, we’ll take the cost of 38,000 minus the amount of depreciation, calculated as 19,000, giving us a year-end book value 12-31-2001, equal to $19,000.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 9 Slide 6 In the second year, at the beginning of 2002, the book value is now 19,000, the cost of 38,000 minus all previously recorded depreciation, totaling 19,000. Take that difference, multiply by two over the asset’s four-year life, remember the fraction is held constant. Depreciation expense in the second year, $9,500. To come up with the book value at the end of the second year, take the cost of the asset, 38,000, minus all depreciation recorded. Nineteen thousand was recorded in the first year and 9,500 in the second year. So as of the end of year two, the total accumulated depreciation, 28,500, giving me a year-end book value at 12-31-02 of $9,500. Make note of something in this problem. It’s a function of this particular example. You notice how the depreciation expense and the year-end book value numbers are the same? In 2001 it was 19,000. In 2002 it was 9,500.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 10 That’s only happening because the life is four years. And because the life is four years, the fraction is 2 over 4, or one half. That’s only gonna happen when the life is four years. It’s not