Marlow Company purchased a point of sale system on January 1 for $3,400. This system has a useful life of 10 years and a salvage value of $400. What would be the accumulated depreciation at the end of the second year of its useful life using the double-declining-balance method?
A.$2,176.
B.$544.
C.$1,200.
D.$600.
E.$1,224.
The Correct Answer and Explanation is :
Correct Answer: E. $1,224
Explanation:
The Double-Declining Balance (DDB) method is an accelerated depreciation method that applies twice the straight-line depreciation rate to the book value of the asset at the beginning of each year.
Step 1: Calculate the Straight-Line Depreciation Rate
[
\text{Straight-line Rate} = \frac{1}{\text{Useful Life}} = \frac{1}{10} = 10\%
]
The double-declining rate is:
[
10\% \times 2 = 20\%
]
Step 2: Calculate Depreciation for Year 1
The initial book value of the asset is $3,400.
[
\text{Depreciation for Year 1} = 3,400 \times 20\% = 680
]
The new book value after Year 1 is:
[
3,400 – 680 = 2,720
]
Step 3: Calculate Depreciation for Year 2
Now, applying 20% to the new book value ($2,720$):
[
\text{Depreciation for Year 2} = 2,720 \times 20\% = 544
]
Step 4: Determine Accumulated Depreciation at the End of Year 2
[
\text{Total Accumulated Depreciation} = 680 + 544 = 1,224
]
Thus, at the end of the second year, the accumulated depreciation is $1,224$, which matches option E.
Why Use the Double-Declining Balance Method?
- Faster Depreciation – It expenses more in the early years, which is useful for assets that lose value quickly.
- Better Matching of Expenses – Businesses often use DDB for assets like technology that become obsolete faster.
- Tax Benefits – Higher initial depreciation reduces taxable income in early years.
Using the DDB method, Marlow Company recognizes $1,224 in accumulated depreciation by the end of year 2.
Now, I will generate an image to illustrate the depreciation calculation visually.
Here is the visual representation of the Double-Declining Balance (DDB) depreciation method, illustrating the depreciation calculations for the first two years. Let me know if you need any modifications or further explanations!
