A company purchased factory equipment for $350,000. It is estimated that the equipment will have a $35,000 salvage value at the end of its estimated 5-year useful life. If the company uses the double-declining-balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be

The amount of annual depreciation for year 2 is: $84000

Explanation:

The double-declining balance method of depreciation is a form of accelerated depreciation. This means that compared to the straight-line method, the depreciation expense will be faster in the early years of the asset's life but slower in the later years. The total amount of depreciation expense during the life of the assets will be the same. It makes sense to use this method with assets that lose value quickly.

The Formula for DDB Depreciation Is

Depreciation = (2x SLDPc) x (Price purchase - accumulated depreciation)



Where:

SLDP = Straight-line depreciation percent Coeficient

Example of Double Depreciation Method:

As a hypothetical example, suppose a business purchased a $60,000 machine, which was expected to last for 10 years. After 10 years, it would be worth $6,000, its salvage value. Under the straight-line depreciation method, the company would deduct $5,400 per year for 10 years (60000-6000) / 10

Using the double-declining balance method, however, it would deduct 20% of $60,000 ($12,000) in year one, 20% of $48,000 ($9,600) in year two, ($7,680) in year three, and so on.

In this exercise

Price = $350.000

Useful life = 5 year

Total depreciable amount = $350000-35000 = $315000

Depreciation year 1 = (2*0,20) * (350000-0) = 140000

Depreciation year 2 = 0,40 * (350000-140000) = 84000

Depreciation year 3 = 0,4 * (350000-224000) = 50400

Depreciation year 4 = 0,4 * (350000-274400) = 30240

Depreciation year 5 = 0,4 * (350000-304640) = 18144