CFA Level IFinancial Statement AnalysisMedium
A machine costs $100,000, has a $10,000 estimated salvage value, and a 5-year useful life. Using the double-declining-balance method, what is the depreciation expense in Year 2?
- A$20,000
- B$16,000
- C$40,000
- D$24,000
Show answer & explanationAnswer & explanation
Correct answer: D. $24,000
DDB rate = 2/5 = 40%. Year 1 depreciation = 100,000 × 40% = $40,000, leaving a book value of $60,000. Year 2 depreciation = 60,000 × 40% = $24,000. Salvage value is ignored until it would reduce book value below it.
Why the other options are wrong
- A. Incorrect — this uses straight-line-like logic, not DDB.
- B. Incorrect — this understates the rate applied to beginning book value.
- C. Incorrect — this is the Year 1 depreciation, not Year 2.
Double-Declining-Balance Depreciation
An accelerated depreciation method that applies a constant rate (double the straight-line rate) to the declining book value each year, ignoring salvage value until the final years.
- Rate = 2 × (1/useful life)
- Applied to beginning-of-year book value, not depreciable base
- Salvage value only matters as a floor near the end of useful life
Memory trick: Double the rate, shrink the base each year