Explaining the Effect of Double-Declining Depreciation by Comparing It vs. the Straight-Line Method
In order to appreciate the significance of this method of depreciation, let us compute the annual depreciation costs produced by the straight-line method.
Annual Depreciation – Straight Line = ($50,000 – S.V. $5,000) / 8 years' estimated life
= $45,000 / 8 years
= $5,625 per year
In comparing the total depreciation expense for the first three years, it shows that had the straight-line method been used, accumulated depreciation would have amounted to only $16,875; as against the amount of $28,906 accumulated by the double-declining method as of the 3rd year. Hence, cost recovery was faster during the asset’s peak years.
Further compare the total amount of depreciation recognized from the 4th year to the 8th year:
- Straight-Line method = 5 years x $5,625 = $28,125
- Double Declining Method = $45,000 - $28,906 = $16,094
The significance of this method is that the allocated costs become much lower at a time when cost of repairs becomes inevitable--hence lessening the burden of cost allocation during these periods.
Based on the US GAAP Accounting Study Guide, the double-declining method can be modified by multiplying the fraction of years by 150% instead of 200%.
Image Credit: Performance Reference Model