Marlow Company purchased a point of sale system on January 1 for $5,800. This system has a useful life of 5 years and a salvage value of $600. What would be the depreciation expense for the second year of its useful life using the double declining balance method?
- $2,320
- $1,328
- $1,392
- $1,040
- $2,080
The correct answer and explanation is:
The correct answer is $1,392.
Explanation:
Marlow Company is using the double declining balance (DDB) method to calculate depreciation. This method 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
The formula for the straight-line depreciation rate is: Rate=100%Useful Life=100%5=20%\text{Rate} = \frac{100\%}{\text{Useful Life}} = \frac{100\%}{5} = 20\%
Since we are using the double declining balance method, we multiply the straight-line rate by 2: DDB Rate=20%×2=40%\text{DDB Rate} = 20\% \times 2 = 40\%
Step 2: Calculate First-Year Depreciation
The first-year depreciation is calculated as: Depreciation=Beginning Book Value×DDB Rate\text{Depreciation} = \text{Beginning Book Value} \times \text{DDB Rate} =5,800×40%=2,320= 5,800 \times 40\% = 2,320
The book value at the end of the first year: 5,800−2,320=3,4805,800 – 2,320 = 3,480
Step 3: Calculate Second-Year Depreciation
For the second year, the beginning book value is $3,480: Depreciation=3,480×40%=1,392\text{Depreciation} = 3,480 \times 40\% = 1,392
Thus, the depreciation expense for the second year is $1,392.
Why Use the Double Declining Balance Method?
The DDB method is useful when an asset loses more value in the earlier years. It allows companies to recognize higher expenses earlier, reducing taxable income and reflecting actual asset usage.