What is the effect of using the Double Declining Balance Method compared to the Straight-Line Method?
Practice Questions
1 question
Q1
What is the effect of using the Double Declining Balance Method compared to the Straight-Line Method?
Higher depreciation expense in early years
Lower total depreciation over the asset's life
Constant depreciation expense each year
Higher salvage value
The Double Declining Balance Method results in higher depreciation expense in the early years compared to the Straight-Line Method.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the effect of using the Double Declining Balance Method compared to the Straight-Line Method?
Solution: The Double Declining Balance Method results in higher depreciation expense in the early years compared to the Straight-Line Method.
Steps: 5
Step 1: Understand what depreciation is. Depreciation is how we spread the cost of an asset over its useful life.
Step 2: Learn about the Straight-Line Method. This method spreads the cost evenly over the years. For example, if an asset costs $1000 and lasts 5 years, the yearly depreciation is $200.
Step 3: Learn about the Double Declining Balance Method. This method calculates more depreciation in the early years. It uses a formula that takes double the straight-line rate.
Step 4: Compare the two methods. In the first year, the Double Declining Balance Method will show a higher depreciation expense than the Straight-Line Method.
Step 5: Understand the impact. Higher depreciation in early years means lower taxable income, which can be beneficial for cash flow.
