Declining-Balance Calculation
Declining-balance depreciation is computed at the same rate each year, but each year this rate is applied to the asset's depreciable basis remaining at the beginning of the year. As a result, annual depreciation deduction amounts are greater in the early years and lower in the later years of an asset's life.
The four most common rate structures for declining-balance depreciation are 125%, 150%, 175%, and 200%, where the straight-line rate would be 100%. Two hundred percent, also known as double declining-balance, is the most widely used. Salvage value does not reduce the depreciable basis for declining balance as it does in other methods. However, the total amount depreciated cannot exceed the difference between the acquisition value and the salvage value.
The declining-balance formula is:
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x Percentage = Rate |
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Rate x Remaining depreciable basis = Annual depreciation |
For an asset with an expected life of 8 years and the double declining-balance method, the rate is:
1 x 200% = 25%
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Remember that if you choose to switch the asset to straight-line (method DB), the calculation changes when deductions allowed by straight-line equal or exceed deductions allowed by declining-balance. If you choose not to switch (method DC), the asset never fully depreciates and has a residual value at the end of its estimated life.