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
C) $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 a rate that is double the straight-line rate. For a 5-year asset, the straight-line rate is 20% (100% ÷ 5 years). Double this rate gives 40%. In year one, depreciation equals the asset's book value ($80,000) multiplied by the double-declining rate (40%), resulting in $32,000. This accelerated method front-loads depreciation expenses.
Why the Other Options Are Wrong
Option B: $80,000
$16,000 represents the straight-line depreciation amount ($80,000 ÷ 5 years = $16,000). This ignores the double-declining acceleration factor and uses the basic straight-line method instead of the required 200% declining balance method.
Option D: $40,000
$80,000 represents the full cost of the equipment, which would mean 100% depreciation in year one. This is incorrect as no depreciation method allows for complete write-off in the first year unless the asset becomes worthless immediately.
Memory Technique
Remember 'Double the Straight Line' - for 5-year life, straight-line is 20%, so double-declining is 40%. Think 'DD = Double the Division' (2 × 1/life).
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