Using the declining balance method with a 200% rate, what is the first year's depreciation on equipment costing $40,000 with a 4-year life?
Correct Answer
A) $20,000
Double declining balance rate = 200% ÷ 4 years = 50% per year. First year depreciation = $40,000 × 50% = $20,000. Salvage value is ignored in declining balance calculations.
Why This Is the Correct Answer
The double declining balance method uses 200% of the straight-line rate. With a 4-year life, the straight-line rate is 25% per year (100% ÷ 4). The double declining rate is 200% × 25% = 50% per year. First year depreciation = $40,000 × 50% = $20,000. This method ignores salvage value in the calculation and applies the rate to the full cost in year one.
Why the Other Options Are Wrong
Option B: $8,000
$8,000 represents using the straight-line method ($40,000 ÷ 4 years = $10,000) but then incorrectly applying 80% of that amount. This confuses the declining balance method with other depreciation calculations and doesn't properly apply the 200% declining balance rate of 50% per year.
Option C: $10,000
$10,000 represents the straight-line depreciation method ($40,000 ÷ 4 years = $10,000 per year). This ignores the 200% declining balance requirement entirely and uses the basic straight-line calculation instead of the accelerated depreciation method specified in the question.
Option D: $5,000
$5,000 appears to use an incorrect rate calculation, possibly dividing the straight-line amount by 2 instead of multiplying by 2. This represents a fundamental misunderstanding of how the 200% declining balance method works, resulting in a depreciation amount that's too low for this accelerated method.
Memory Technique
Remember 'Double Declining = Double Trouble for taxes' - the 200% rate means you take TWICE the straight-line rate. For 4 years: straight-line is 25%, so double declining is 50% of the FULL cost in year one.
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