Depreciation Calculations

This page illustrates the computation of the straight-line and double-declining balance methods of depreciation using the following example.


                    Cost of Asset               10,500
                    Salvage Value                  500
                    Life                       5 years

1.  Straight-Line Depreciation


    Note that the straight line calculation considers salvage value up front
    in the calculation.

       10,500 cost - 500 salvage value  = 2,000 per year
       -------------------------------
                 5 year life


                         Depreciation     Accumulated         Book
       Year     Cost       Expense        Depreciation       Value
       ----   --------   -------------   -------------      --------
         1     10,500       2,000            2,000            8,500
         2     10,500       2,000            4,000            6,500
         3     10,500       2,000            6,000            4,500
         4     10,500       2,000            8,000            2,500
         5     10,500       2,000           10,000              500


2.  Double-declining Balance Depreciation

    The double-declining balance method ignores salvage value
	in the initial calculation.  However, depreciation expense will be
	limited if the calculated amount would result in the book value
	dropping below the salvage value.  For example, suppose an asset
	has a prior book value of $600 and a salvage value of $500.  In
	this case, depreciation expense is limited to the remaining
	$100 book value in excess of salvage value.

    Also, each year comparisons are made between the declining balance rate
    calculations and straight-line depreciation of the remaining book value.
    A switch to the straight-line calculation is made in the year in which
    the straight-line calculation exceeds the declining balance rate
    calculation.

    > DDB rate = 1/Life x 2 = 1/5 x 2 = 40%
    > Declining balance rate depreciation = Beginning of period carrying value
                                            x DDB rate

                                      Calculations
                  -----------------------------------------------------
       Year                DDB                      Straight-Line
       ----       ----------------------      -------------------------
         1         10,500 x 40% = 4,200       (10,500 - 500)/5 = 2,000
         2          6,300 x 40% = 2,520       ( 6,300 - 500)/4 = 1,450
         3          3,780 x 40% = 1,512       ( 3,780 - 500)/3 = 1,093
         4          2,268 x 40% =   907       ( 2,268 - 500)/2 =   884
         5          1,361 x 40% =   544       ( 1,361 - 500)/1 =   861

         Note: Switch to straight-line in year 5 since its calculation
               exceeds the DDB calculation.

                         Depreciation     Accumulated         Book
       Year     Cost       Expense        Depreciation       Value
       ----   --------   -------------   -------------      --------
         1     10,500       4,200            4,200            6,300
         2     10,500       2,520            6,720            3,780
         3     10,500       1,512            8,232            2,268
         4     10,500         907            9,139            1,361
         5     10,500         861           10,000              500