Under the double-declining balance depreciation method, what is the depreciation rate for equipment with a 5-year useful life?
Correct Answer
C) 40%
Double-declining balance rate = 2 × (1 ÷ useful life). For 5-year equipment: 2 × (1 ÷ 5) = 2 × 20% = 40%. This method accelerates depreciation 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 equipment with a 5-year useful life, the straight-line rate is 1/5 = 20%. The double-declining balance rate is therefore 2 × 20% = 40%. This accelerated depreciation method applies 40% to the remaining book value each year, providing higher depreciation expenses in the early years of the asset's life.
Why the Other Options Are Wrong
Option A: 20%
20% represents the straight-line depreciation rate (1/5 = 20%), not the double-declining balance rate. The double-declining method requires doubling this straight-line rate to achieve accelerated depreciation.
Option B: 50%
50% would be incorrect as it represents 2.5 times the straight-line rate rather than double. This rate is too high and would result in excessive depreciation that doesn't follow the double-declining balance formula.
Option D: 25%
25% is neither the straight-line rate (20%) nor double the straight-line rate (40%). This percentage doesn't correspond to any standard depreciation calculation for a 5-year asset under accepted accounting methods.
Memory Technique
Remember 'Double Trouble': Double-declining = 2 × straight-line rate. For any asset, divide 100% by useful life years, then double it. 5 years = 20% straight-line, so 40% double-declining.
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