Bart owns a brewery that specializes in a beer containing caffeine. He recently purchased a $20,000 coffee maker to help add a kick to his brew. He expects the coffee maker to have a useful life of ten years and have a salvage value of $2,000. If Bart’s brewery, Bart’s Brewskies, is using the double declining depreciation method, how much would he depreciate in the first year?
Explanation
Answer - D - Using the double declining depreciation method, the first year’s depreciation is $4,000. This is shown by plugging the numbers into the formula: Depreciation Base x (2 x 100% / Useful life of asset).
Key Takeaway: The salvage value has no bearing on the depreciation taken. For the double declining deprecation method, you are calculating the percentage of depreciation using the straight line method, which is 100% divided by the number of years of useful life. You’ll then have a percentage, which is doubled then multiplied by the depreciation base. In the first year, the base is the cost of the asset. In this example, the base of the second year would be $16,000.
