Declining-Balance Example

A company bought new cleaning equipment worth $6,000 on August 15, 2010, with an estimated life of 8 years and a salvage value of $300. The company sees the following results from calculating depreciation using double declining-balance depreciation and taking the 20% first-year bonus. If the company uses method DB (switch to straight-line when optimal), the system calculates straight-line depreciation figures at the same time to determine when to make the switch. The system calculates the straight-line amount on the remaining basis for each year.

The bonus depreciation is 20% of $6,000 ($1,200). To calculate the rate for the double declining-balance computations, divide the percentage by the estimated life:

200% = 25%

The beginning depreciable basis for the declining-balance computations is:

$6,000 - $1,200 = $4,800

For the first year, during which the equipment was in service only 5 months (August to December using the midmonth convention), the declining-balance calculation is:

$4,800 x .25 x 5/12 = $500

The total first-year depreciation is $500 plus the $1,200 first-year bonus, a total of $1,700.

For subsequent years, you calculate the asset's remaining depreciable basis by subtracting the accumulated depreciation from the beginning depreciable basis (from which you already subtracted bonus depreciation).

The second and third year declining-balance calculations are:

Year 2	($4,800 - 500)	x .25 = $1,075.00
Year 3	[$4,800 - (500 + 1,075)]	x .25 = $ 806.25

If the company uses method DB (switches to straight-line when optimal), the switch occurs for the year in which the straight-line depreciation is greater than the declining-balance depreciation. This occurs in year 7, when straight-line depreciation is $278.87 and declining-balance is $255.10.