CFA Level I · CFA Level I Exam · Analysis of Long-Term Assets
An asset costing 200,000 with a residual value of 20,000 and a 5-year life is depreciated using the double-declining balance method. Depreciation expense in year 2 is closest to:
Year 2 depreciation is about 48,000. The double-declining rate is 40%, year 1 expense is 80,000, leaving a carrying amount of 120,000, and 40% of that is 48,000. Residual value is ignored in the base until the floor is reached.
- A48,000Correct
- B72,000
- C80,000
Explanation
The rate is 2/5 = 40%. Year 1: 200,000 x 40% = 80,000, so the carrying amount is 120,000. Year 2: 120,000 x 40% = 48,000. Residual value is not deducted from the base, and the floor of 20,000 is not reached.
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