Calculating Depreciation Expense Using The Double
Declining Balance Method
A firm purchased computer aided drafting and machining (CAD CAM) equipment at the beginning of 1998 for $420,000. The machine has an expected useful life of six years and a $38,000 residual value. Assume that the firm begins the year (before purchasing the CAD CAM equipment) with the following balance sheet totals:
|
Plant and equipment |
$6,250,000 |
|
Less: Accumulated depreciation |
(1,145,000) |
|
Plant and equipment, net |
$5,105,000 |
Required
a. Calculate the ending balances in each of these accounts after including the annual double declining balance depreciation for the first four years of the equipment’s life. Ignore depreciation on the existing plant and equipment.
b. After the firm has owned the CAD CAM machine for six years, what effects would the use of straight line depreciation versus double declining balance depreciation have on the firm’s net income? Why?