Declining-Balance Example

An organization bought new cleaning equipment worth $6,000 on August 15, 2007, with an estimated life of 8 years and a salvage value of $300. The organization sees the following results from calculating depreciation using double declining-balance depreciation. If the organization 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.

To calculate the rate for the double declining-balance computations, divide the percentage by the estimated life:

200% / 8 = 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

For subsequent years, you calculate the asset's remaining depreciable basis by subtracting the accumulated depreciation from the beginning depreciable basis.

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 organization 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.