CFA Level I · CFA Level I Exam · Analyzing Income Statements
A company purchases equipment for 120,000 with a residual value of 20,000 and a useful life of 5 years. Using the double-declining balance method (rate based on straight-line rate, applied to carrying amount), depreciation expense in year 2 is closest to:
Double-declining balance uses 40% of opening carrying amount. Year 1 depreciation is 48,000, leaving 72,000. Year 2 depreciation is 40% of 72,000, or about 28,800. Residual value is ignored when computing the rate base but limits total depreciation.
- A28,800Correct
- B38,400
- C48,000
Explanation
Straight-line rate is 20%, so the DDB rate is 40%. Year 1 = 120,000 x 40% = 48,000; carrying amount 72,000. Year 2 = 72,000 x 40% = 28,800. 48,000 is year 1; 38,400 wrongly deducts residual value first (100,000 x 40% x ... ) and is not correct.
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