A construction company uses the double-declining balance method to depreciate a $80,000 piece of equipment with a 5-year useful life. What is the depreciation expense for the first year?
Correct Answer
C) $32,000
Double-declining balance rate = 2 ÷ 5 years = 40%. First year depreciation = $80,000 × 40% = $32,000. This accelerated method takes larger deductions in early years.
Why This Is the Correct Answer
The double-declining balance method uses a depreciation rate that is double the straight-line rate. For a 5-year asset, the straight-line rate is 20% (100% ÷ 5 years), so the double-declining rate is 40% (20% × 2). First year depreciation = $80,000 × 40% = $32,000. This accelerated depreciation method front-loads expenses to match the equipment's higher productivity in early years.
Why the Other Options Are Wrong
Option A: $24,000
$24,000 represents 30% of the asset cost, which doesn't correspond to any standard depreciation method calculation. This might result from incorrectly calculating 1.5 times the straight-line rate instead of double, or from other computational errors in applying the double-declining balance formula.
Option B: $16,000
$16,000 represents the straight-line depreciation amount ($80,000 ÷ 5 years = $16,000). This is incorrect because the question specifically asks for double-declining balance depreciation, not straight-line. This is a common error when candidates confuse depreciation methods.
Option D: $40,000
$40,000 would represent 50% of the asset cost, which exceeds the correct double-declining balance rate of 40%. This error might occur from incorrectly calculating the depreciation rate or misunderstanding that double-declining balance uses twice the straight-line rate, not 50% automatically.
Memory Technique
Remember 'Double the Trouble' - Double-declining balance = 2 × (100% ÷ useful life). For 5 years: 2 × 20% = 40%. Then multiply by asset cost.
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