Solutions/Accounting & Finance
Accounting & FinanceLevel: Intermediate

Depreciation Accounting: Straight-Line vs Accelerated Methods

Reviewed by David Thorne, FCA.
Free Educational Resource
Problem Statement / Assignment Scope

An enterprise purchases manufacturing machinery for Ā£100,000 with an estimated useful life of 5 years and a residual salvage value of Ā£10,000. Calculate Year 1 and Year 2 depreciation under both methods.

Prerequisites: Fixed asset capitalization, salvage value, and useful life concepts.

Step-by-Step Worked Solution

1. Straight-Line Method

Annual Depreciation = (Cost - Salvage Value) / Useful Life = (Ā£100,000 - Ā£10,000) / 5 = Ā£18,000 / year

2. Double Declining Balance (DDB) Method

Straight-line rate = 1/5 = 20%. Accelerated DDB rate = 20% Ɨ 2 = 40%.

  • Year 1: Ā£100,000 Ɨ 40% = Ā£40,000. (Ending Book Value = Ā£60,000).
  • Year 2: Ā£60,000 Ɨ 40% = Ā£24,000. (Ending Book Value = Ā£36,000).

Key Takeaways & Core Principles

  • Straight-Line subtracts salvage value upfront; Double Declining Balance ignores salvage value in initial rate calculations but stops depreciating once book value reaches salvage value.
  • Accelerated depreciation reduces taxable income in early asset years.

Frequently Asked Questions

What happens when book value equals salvage value under DDB?

Depreciation ceases immediately. An asset can never be depreciated below its estimated salvage value.

Academic References & Standards

  • [1]IASB. (2023). IAS 16: Property, Plant and Equipment. Source Link
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