A contractor is preparing for tax season and needs to determine the tax implications of an asset purchase. The contractor bought a new excavator for $120,000. It has an estimated useful life of 5 years and an estimated salvage value of $20,000. Using the double-declining balance (DDB) method, what is the depreciation expense for the second year?
- A$48,000
- B$24,000
- C$28,800
- D$32,000
Show answer & explanationAnswer & explanation
Correct answer: C. $28,800
Double-declining balance (DDB) depreciation ignores salvage value in the calculation until the asset's book value reaches the salvage value. The straight-line rate is 1/useful life = 1/5 = 20%. The DDB rate is double the straight-line rate, so 2 * 20% = 40%. Year 1: Book Value = $120,000. Depreciation = $120,000 * 40% = $48,000. End of Year 1 Book Value = $120,000 - $48,000 = $72,000. Year 2: Depreciation = $72,000 * 40% = $28,800. This is above the salvage value, so it's fully deductible.
Why the other options are wrong
- A. This is the depreciation for the first year using the DDB method ($120,000 * 40% = $48,000).
- B. Incorrect. This would be the depreciation for the second year if the straight-line method was used on the depreciable base ($100,000/5 years = $20,000) and then adjusted, or a miscalculation.
- D. Incorrect. This is the Year 1 depreciation if the depreciable base was $80,000 ($80,000 * 40% = $32,000), or a miscalculation.
Double-Declining Balance (DDB) Depreciation
An accelerated depreciation method that expenses more of an asset's cost in the earlier years of its useful life, calculated by doubling the straight-line depreciation rate and applying it to the asset's book value each year.
- Salvage value is ignored in the calculation until the book value approaches it.
- Depreciation rate is (2 / Useful Life).
- Applied to the asset's beginning-of-year book value, not depreciable base.
Memory trick: Double means double the speed, declining means less each year.