Question

4) Date Placed in Service or Obsolescence: reduction in value once the asset is outdated. 4) Explain what double declining balance (DDB) depreciation is, and how it is/was used (its principal purpose). For taxes, what depreciation method has replaced it? IF

Answer 1

a) Double declining balance method is a form of an accelerated depreciation method in which the asset value is depreciated at twice the rate it is done in the straight-line method. Since the depreciation is done at a faster rate (twice to be precise) of the straight-line method it is called accelerated depreciation.

b) However, accelerated depreciation does not mean that the depreciation expense will also be higher. The asset will depreciate by the same amount however it will be expensed higher in early years of its useful life while the depreciation expense will be lower in the later years of as compared to the straight line method of depreciation. Double Declining Balance Method Formula = 2 X Cost of the asset X Depreciation rate.

c) PRINCIPAL PURPOSE of Double Declining Balance method is  to have a consistent combination of depreciation expense and repairs and maintenance expense during the life of the asset. In other words, in the early years of the asset's life, when the repairs and maintenance expenses are low, the depreciation expense will be high. In the later years of the asset's life, when the repairs and maintenance expenses are high, the depreciation expense will be low. While this seems logical, the company will end up reporting lower net income in the early years of the asset's life.

d) Some companies use accelerated depreciation methods to defer taxes into future years, such as double declining balance depreciation.By accelerating the depreciation method and incurring a larger expense in earlier years and a smaller expense in later years, taxes are pushed out.There are various alternative methods that can be used for calculating a company’s annual depreciation expense like straight line method, declining balance method, units of production method, etc. Essentially, companies can use whatever method they want to use, provided they offer some explanation for why they use that method. Tax implication is different under different methods. Under straight line method, tax expense would be equally distributed over the life of the asset. But under declining balance method, tax is lower in the initial years, but will certainly increase over the life of the asset. Company can choose whatever method it wants. No restriction on selection of method under any act.