Lesson Objectives:- Using the straight line method
- Recording the depreciation expense journal entry
- Calculating depreciation with the double declining balance method
Now that you have a basic understanding of when the straight line and double declining balance depreciation methods are used, let's take a look at a few real-world examples of how the methods are used.
For the first example, let's say that Bright Corp. purchased a piece of manufacturing equipment for $26,000 on January 1, 2013. The equipment has a lifespan of 20 years but the useful life is only 5 years. The estimated salvage value of the equipment is $6,000.
Let's start with the straight-line method as it is the easiest method to calculate depreciation. We will subtract the salvage value of $6,000 from the total cost of $26,000 and divide by the useful life of 5 years to get a depreciation expense amount of $4,000 per year.
The straight-line method will have the same amount of depreciation each month, therefore the net realizable value will be deducted by the same amount each year as you can see in the table above. The net realizable value will reach the salvage value at the end of year 5 as that is the end of its usable life.
At the end of 2013, the expense would be recorded on the balance sheet by debiting the depreciation expense account for $ 4,000 since the normal balance for expense accounts is a debit. We will then credit the contra asset account for $4,000 which is the accumulated depreciation account.
Let's move on to reviewing the same example in the context of the double declining balance.
In order to calculate the depreciation rate for the piece of equipment using the double declining balance, we would first need to divide 100% by the useful life of 5 years. This would give us a rate of 20% which we would need to multiply by 2 since we are using the double declining balance instead of just the standard declining balance method.
Next, we would use the table above to record the depreciation expenses over the 5 year useful life. For year 1, we would multiply the net realizable value by the 40 percent rate to come up with a depreciation expense of $10,400. This would leave us with a net realizable value of $15,600 at the end of year 1.
We would then continue to calculate the depreciation expenses by multiplying the depreciation rate by the net realizable value of the previous year. As you can see, the depreciation expense value is quickly declining and by the end of year 3, the balance has already dropped below the salvage value of $6,000. For this year, we would only record $3,360 worth of depreciation expense in order to record the net realizable value of $6,000.
In this example, the asset was expensed prior to the end of its usable life so no depreciation expenses would be recorded for years 4 and 5.
This concludes our review of depreciation method examples and we will be moving onto disposals of assets in the next lesson.