A construction company uses declining balance depreciation at 200% (double-declining) for equipment costing $80,000 with a 5-year life. What is the depreciation expense in year one?
Correct Answer
B) $32,000
Double-declining rate = 2 × (1 ÷ useful life) = 2 × (1 ÷ 5) = 40%. First year depreciation = $80,000 × 40% = $32,000. This method accelerates depreciation in early years.
Why This Is the Correct Answer
The double-declining balance method uses twice the straight-line rate applied to the book value each year. The straight-line rate for 5 years is 20% (1÷5), so the double-declining rate is 40% (2×20%). In year one, we apply this 40% rate to the full original cost of $80,000, resulting in $32,000 depreciation expense. This accelerated method front-loads depreciation to match the reality that equipment loses value faster in early years.
Why the Other Options Are Wrong
Option A: $16,000
$16,000 represents the straight-line depreciation amount ($80,000 ÷ 5 years), not the accelerated double-declining balance method.
Option C: $40,000
$40,000 would be 50% of the asset cost, which exceeds the calculated 40% double-declining rate for a 5-year asset.
Option D: $80,000
$80,000 represents 100% of the asset cost, which would mean fully depreciating the equipment in year one - this is not how double-declining balance works.
Memory Technique
Remember 'Double = 2 ÷ Years' - for double-declining balance, divide 2 by the useful life to get your depreciation rate percentage.
Reference Hint
Look up 'Depreciation Methods' or 'Double-Declining Balance Method' in accounting or business management chapters of your contractor reference manual.
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