Double Line Method and the Straight Line Method
Ball and Bats, Inc.: Double Line method and the Straight Line Method
On January 1, 2005 the company Balls and Bats, Inc. made a purchase of equipment. The cost of the equipment was one hundred thousand dollars and had life expectancy of four years. The following schedules are the double-declining balance method and the straight line method of depreciation. This schedule will assist Balls and Bats, Inc determine the best method to depreciate there new acquisition. Further, the schedules will determine which will glean a higher net income for the organization for the year ending December 31, 2005.
Double-declining balance method (DDB)
Year 1: D= .50(100,000) = 50,000
Year 2: D= .50(100,000- 50,000) = .50(50,000) = 25,000
Year 3: D= .50(100,000-50,000-25,000) = .50(25,000) = 12,500
Year 4 D= .50(100,000-50,000-25,000-12,500) = .50(12,500) = 6,250
Declining-Balance at Twice the Straight-Line
Rate (DDB) Annual Depreciation Book Value
At Acquisition 100,000
2005 50,000 50,000
2006 25,000 25,000
2007 12,500 12,500
2008 2,500 10,000
Total 90,000 The Double-declining method is calculated utilizing the following formula: DDB rate = 2(100%/n). In this case when calculating year four, we cannot go below the salvage value of 10,000 hence the amount of 2,500 is deducted from year three book value, hence year four ends with a 10,000 book value.
Straight-Line Method
The straight line method spreads the depreciation evenly over the life of the asset. (Horngren, Sundem, Elliot, Philbrick, 2006, p. 342) The straight line method is calculated using the following formula:
Depreciation expense = (Acquisition cost Estimated Residual value/ years of useful life. In this case,
22,500= 90,000/4= 100,000- 10,000/4
On January 1, 2005 the company Balls and Bats, Inc. made a purchase of equipment. The cost of the equipment was one hundred thousand dollars and had life expectancy of four years. The following schedules are the double-declining balance method and the straight line method of depreciation. This schedule will assist Balls and Bats, Inc determine the best method to depreciate there new acquisition. Further, the schedules will determine which will glean a higher net income for the organization for the year ending December 31, 2005.
Double-declining balance method (DDB)
Year 1: D= .50(100,000) = 50,000
Year 2: D= .50(100,000- 50,000) = .50(50,000) = 25,000
Year 3: D= .50(100,000-50,000-25,000) = .50(25,000) = 12,500
Year 4 D= .50(100,000-50,000-25,000-12,500) = .50(12,500) = 6,250
Declining-Balance at Twice the Straight-Line
Rate (DDB) Annual Depreciation Book Value
At Acquisition 100,000
2005 50,000 50,000
2006 25,000 25,000
2007 12,500 12,500
2008 2,500 10,000
Total 90,000 The Double-declining method is calculated utilizing the following formula: DDB rate = 2(100%/n). In this case when calculating year four, we cannot go below the salvage value of 10,000 hence the amount of 2,500 is deducted from year three book value, hence year four ends with a 10,000 book value.
Straight-Line Method
The straight line method spreads the depreciation evenly over the life of the asset. (Horngren, Sundem, Elliot, Philbrick, 2006, p. 342) The straight line method is calculated using the following formula:
Depreciation expense = (Acquisition cost Estimated Residual value/ years of useful life. In this case,
22,500= 90,000/4= 100,000- 10,000/4
References: Horngren, C. T., Sundem, G. L., Elliot, J. A., & Philbrick, D. R., (2006). Introduction to financial accounting. Upper Saddle River: Pearson-Prentice Hall.