A construction company uses the declining balance method with a 200% rate for equipment depreciation. If equipment costs $80,000 with a 5-year life, what is the first year's depreciation expense?
Correct Answer
B) $32,000
Double declining balance rate = (200% ÷ 5 years) = 40% per year. First year depreciation = $80,000 × 40% = $32,000.
Why This Is the Correct Answer
The double declining balance method uses 200% of the straight-line rate, which means we double the normal depreciation percentage. With a 5-year life, the straight-line rate would be 20% per year, so the double declining rate is 40% per year. In the first year, we apply this 40% rate to the full original cost of $80,000, giving us $32,000 in depreciation expense.
Why the Other Options Are Wrong
Option A: $40,000
$20,000 represents 25% of the equipment cost, which doesn't correspond to any standard depreciation method for 5-year equipment.
Option C: $20,000
$16,000 represents only 20% of the equipment cost, which would be the straight-line depreciation amount, not the accelerated double declining balance amount.
Memory Technique
Remember 'Double the Trouble' - double declining balance literally means doubling the straight-line rate, making depreciation twice as fast in early years.
Reference Hint
Look up 'Accelerated Depreciation Methods' or 'Double Declining Balance Method' in accounting or business management chapters of your reference materials.
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