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10 - Double-Declining-Balance and Changes in Estimates - YouTube
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this is principles of accounting dot-com
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chap
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ten and in this module we will look at
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the double
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creation as well as changes in estimates
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and so the double declining balance
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method is one of several accelerated
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depreciation methods it results in
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larger amounts of depreciation in
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earlier years and lesser amounts in
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later years of assets asset life it's
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justified if the quality of service
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produced by an asset declines over time
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or if repair and maintenance costs are
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expected to rise over time both of those
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are explanations or reasons or
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justifications for accelerated methods
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although indeed no particular
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justification is needed it's one of
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several acceptable depreciation methods
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with double declining balance we're
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going to take 200 percent of the
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straight-line rate and multiply that
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times the remaining book value of the
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asset at the end of each period to
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determine depreciation for a particular
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period so let's look at an example this
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is the same asset we looked at in a
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previous module with straight-line it
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has a one hundred thousand dollar cost a
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ten thousand dollar salvage value and a
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four year useful life so double
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declining balance would look like this
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first of all recognize that with a four
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year service life the straight-line rate
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is 25% per year so twice the
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straight-line rate or the double
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declining balance is 50% so we're going
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to take the initial asset cost of
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100,000 times 50% to get the first year
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depreciation expense of 50,000 that will
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cause a reduction in the book value to
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50,000 that is cost of a hundred
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thousand minus $50,000 of accumulated
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depreciation gives us a remaining book
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value or balance of 50,000 times twice
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the straight-line rate to get year twos
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depreciation of 25,000 each year will be
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reduced correspondingly the last year
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can become a bit problematic we would
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have a remaining $12,500 of net book
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value going into that year and 50% times
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that would be you know well in excess of
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$2,500 but for some reason I'm only
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showing 2500 is depreciation expense and
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the reason is we've ignored salvage
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value to this point in the calculations
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we're going to only take salvage value
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into account when we depreciate down to
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or through the depreciable base we had a
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$90,000 depreciable base we hit that in
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the last year and we simply cut off at
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that point and don't record anymore
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depreciation expense so let's review
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that concept
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salvage value is initially ignored with
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double declining balance but once
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accumulated depreciation reaches the
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amount of the depreciable base
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depreciation ceases for year four the
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calculated amount of depreciation would
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be 60 to 50 that is a hundred thousand
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cost minus the previous accumulated
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depreciation times fifty percent would
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give us 60 to 50 but that would cause
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total accumulated depreciation to exceed
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the 90,000 depreciable base so we'll
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only book 2500 of depreciation expense
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in the last year if the asset has no
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silage value the double declining
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balance would never fully depreciate the
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asset usually a company will change to
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straight-line near the end of the useful
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life of an asset simply to finish off
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the accounting for the full cost of the
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asset if there is no salvage value they
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are spreadsheet robots for this here's
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an example where we have the formula DD
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be $100,000 cost $10,000 salvage value
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for year life and then the final
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variable is indicating that we're in
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year three of this of the life the
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depreciation returned would be $12,500
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again here's a pop-up box where one
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could fill in the variables and it would
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return a formula result of 12,500 in
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this case so these spreadsheet tools are
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very useful even for depreciation
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calculations let's consider fractional
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period of depreciation with double
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declining balance the first partial year
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will be a fraction of the annual amount
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all subsequent years when we based on
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the normal calculation in this case
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we've got our $100,000 asset times twice
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a straight line rate or 50% but we only
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use the asset for nine months or nine
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twelfths of a year and so we return
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37,500 of depreciation for the year and
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that takes us into the next year with a
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book value of 100,000 cost- 37,500 of
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accumulated depreciation we start the
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year with 62,500 net book value times
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twice the straight-line rate or 50%
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would give us thirty one thousand two
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hundred and fifty dollars as
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depreciation expense once again as we
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near the end of the useful life here we
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can see that will simply stop
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depreciating when accumulated
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depreciation reaches the $90,000
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depreciable base alternatives to DDB 150
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percent declining balance method the 125
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percent declining balance
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method identical methodologies to what
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we just looked at except that rather
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than using twice the straight-line rate
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we'll use one and a half or one and a
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quarter times the straight-line right
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finally let's think about changes and
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estimates for depreciation assumptions
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about useful life and depreciable base
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are merely estimates a new information
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may periodically suggest revisions of
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estimates a change in estimate does not
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require restatements of prior periods
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financial statements these changes are
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handled prospectively over future
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accounting periods so by way of example
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let's assume I $100,000 for your live
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desk set with $10,000 salvage value has
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been depreciated for two years at the
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beginning of the third year new
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information suggests the asset will have
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a total life of seven years and a $5,000
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salvage value
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the revised remaining depreciable base
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should be spread over the revised
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remaining useful life and so here's the
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calculations the first year we took
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twenty two thousand five hundred the
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next year we took twenty two thousand
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five hundred but in year three we're
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changing our estimates we're changing
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from a four year life to a five year
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life and we're changing over ten
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thousand dollars salvage value to a five
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thousand dollar salvage value the
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depreciation already taken is forty five
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thousand so our cost of a hundred
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thousand minus the depreciation already
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taken leaves us fifty five thousand of
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remaining cost five thousand of which
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will be recovered through salvage value
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and so our calculation the hundred
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thousand cost minus depreciation are
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already taken - remaining salvage value
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is spread over the remaining life of
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five years and we'll get $100,000 for a
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year three and boosting our accumulated
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depreciation of fifty five thousand and
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so it will go for each subsequent year
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in closing this module I would like to
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point out issues about asset revaluation
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international financial reporting
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standards actually include provisions
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that permit companies to revalue items
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of property plant and equipment to fair
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value at each reporting date when
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applied all assets in the same class are
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to be revalued annually these
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adjustments to valuation are offset with
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changes in capital accounts but they
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also result in continuous alterations of
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depreciation amount so depreciation can
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become far more complex under the
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international reporting system that
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allows
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or permits revaluation of assets
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