Calculations
A car bought for $100 000 has a lifespan of 20 years. Salvage value is $10 000. In double declining, what is the percentage that it will depreciate by?
10%
A car that is worth $110 000 has a lifespan of 20 years. Accumulated amortization for 1 year is $11 000.
Was an error made? If so, what error was made? If not, explain how the answer was found.
No error was made in the process. 100 / 20 = 5 * 2 = 10%
$110 000 x 10% = $11 000
Define double declining balance method of amortization (be specific).
It is a form of amortization that decreases at a percentage of the asset's value. This specific percentage is calculated by doubling 100% divided by the number of years of the asset's life.
What is a potential mistake that could be made during the process?
Forgetting to double the rate, subtracting salvage value, etc.
A building is bought for $565 000 with a lifespan of 25 years and salvage value of $100 000. Amortization method is double decline. What is its net book value after the first year?
Rate: 8%/year
Acc. Amrt: 565 000 x 0.08 = 45 200
NBV: 565 000 - 45 200 = $519 800
Question: Equipment's value is $55 000 with a lifespan of 8 years. A student calculates the amortization for 1 year and writes
"Dr. Amortization Expenses 13 750
Cr. Equipment 13 750"
Was an error made? If so, what error was made? If not, explain how the answer was found.
The error was directly crediting the amortization to the equipment. In amortization, a contra account named "Accumulated Amortization - [asset name]" is made. It is never directly subtracted from the asset account itself.
Give 2 examples of assets that could use double declining method.
Equipment, building, car, etc.
What are the temporary and permanent accounts involved in double declining?
Temporary: Amortization Expense
Permanent: Accumulated Amortization - [asset]
A building worth $750 000 is bought with a salvage value of $50 000 and a lifespan of 23 years. What is the accumulated amortization after 2 years(round result to nearest hundredth)?
Double decline rate: 8.7%
Year 1: 750 000 x 0.087 = 65 250
Year 2: 684 750 x 0.087 = 59 573.25
Acc. Amrt = 65 250 + 59 573.25 = $124 823.25
Equipment worth $67 000 will be in the business for 25 years. Amortization for the first year using double decline is calculated to be $2680.
Was an error made? If so, what error was made? If not, explain how the answer was found.
Yes, an error was made. $2 680 is the amortization calculated if you did not multiply the rate by 2 to get the rate for double decline. It is 4% of $67 000. The actual accumulated amortization should be double it, at $5 360.
Name 2 differences and 2 similarities between straight-line and double declining amortization. Be specific as possible.
Don't just say "they're amortization"
Similarities:
1. They both depend on the years of asset life
2. They both result in the creation of a contra account
Difference:
1. Straight-line is a constant value every year while double declining fluctuates depending on net book value.
2. Straight-line considers salvage value when calculating the amortization per year, double decline ignores it during calculation.
List the process for finding the amortization of 7 months using double decline.
1. Find rate
2. Subtract accumulated amortization
3. Multiply asset's book value by the rate
4. Multiply the result by 7/12
A building is valued at $650 000 with a lifespan of 30 years and a salvage value of $50 000. Using straight-line and double declining methods (round to nearest percent), which would have the higher amortization for the 3rd year*?
*This means amortization for ONLY that year, not accumulated
Double decline has the higher balance
Straight-line: $20 000/year
Double Decline: $39 252.95 for year 3
A building worth $855 000 has a lifespan of 25 years and a salvage value of $55 000. Accumulated amortization after the second year was calculated to be $131 328.
Was an error made? If so, what error was made? If not, explain how the answer was found.
No error was made.
100 / 25 x 2 = 8%
$855 000 x 8% = $68 400 (first year)
$786 600 x 8% = $62 928 (second year)
Acc. Amrt = 68 400 + 62 928 = $131 328
An asset has a life of 20 years. At the 18th year, which form of amortization would have a higher amortization expense for the year, double decline or straight line?
Straight line. The amount of amortization expense per year for double decline decreases with every year. By the time it gets to the later years, the asset has amortized by so much that the expense would be barely anything.
A building is bought for $950 000 with a salvage value of $100 000 and a lifespan of 15 years. Using double decline, which is the correct amount of amortization for 5 months of the first year?
a) $46 041
b) $51 458
c) $23 750
d) $10 291
b) is the correct answer
100% / 15 x 2 = 13%
$950 000 x 13% = 123 500
123 500 x 5/12 = $51 458