11 Property, Plant, & Equipment

Method 2: Declining Balance

Declining balance is a depreciation method that results in high depreciation at the beginning of the asset’s useful life and low depreciation at the end of its useful life. Can you think of examples where declining balance would be appropriate? Maybe for a vehicle. A vehicle loses its value very quickly in the first five years and then its value declines slowly over its remaining life. We calculate declining balance depreciation as:

The Net Book ValueNet Book Value (NBV):
An asset’s NBV is its carrying amount on the financial statements. The NBV of long-lived asset is calculated as cost less accumulated depreciation. is the asset’s cost less its accumulated depreciation. And the declining balance multiple determines how fast the asset depreciates. This multiple will be given in assignments or exams and is usually between one and three: single declining balance, double declining balance, or triple declining balance. In real life, companies choose a multiple that reflects how quickly the asset depreciates. High multiples are used for assets that depreciate quickly after purchase. Because this method uses the net book value as a starting point, we do not have to worry about the residual value until the last year of useful life. I mean, net book value is calculated as cost less accumulated depreciation, and there’s no residual value in that calculation.

So when do we use the residual value in the declining balance method? Right at the very end. In the year of disposal, which is the last year of useful life, a company depreciates the net book value down to the residual value. In that last year we want the asset to show up on the Statement of Financial Position at the amount at which we intend to sell it. And that makes sense, right? The value of the asset to us once we’re done using it is the cash we expect to get from it: the residual value in this case.

Let’s give declining balance a try. Refer to Jody’s joinery, Flo’s Flowers, and Ryder’s Motorsport, but instead of calculating depreciation using the straight-line method, let’s use declining balance. Remember that each company takes a half year’s depreciation in the year of purchase.

My Turn:

Jody’s Joinery (equipment cost = $49,240; useful life = 20 years; residual value = $5,000): Jody uses double declining balance. Record depreciation on the welding equipment at 31 Dec 20X1 and 31 Dec 20X2.

Required:

What is the Statement of Financial Position presentation at 31 December 20X3? That is, after three years of depreciation.

* – half a year’s depreciation in the year of purchase.

Statement of Financial Position Presentation at 31 Dec. 20X3:

Your turn. See how you get on calculating declining balance depreciation for Flo’s Flowers!

You did it! Now here’s another one just for fun: Ryder’s Motorsport 😉

Well done! Now that you have some practice with declining balance depreciation, let’s move to an activity-based method: units of production!