Depreciation: Declining
Balance Method
( Constant Percentage Method)
Introduction
What Is the Declining Advantages
Balance Method of AND Formula
Assets Depreciation?
Disadvantages
What Is the Declining Balance Method of
Assets Depreciation?
Under the declining balance method,
depreciation is charged on the book value of
the asset and the amount of depreciation
decreases every year.
Decreasing depreciation expense and
increasing maintenance of an asset might
smooth the income.
Ignores salvage value in determining the
amount to which the declining- balance rate
ADVANTAGES
1. Equal Burden: The method creates a 2. Simple Method: An
burden to use assets more in each important strength of the
subsequent year. The amount of declining balance method is
depreciation continues to decrease for that it is simple to
each subsequent year, whereas the
understand and easy to
charge for repairs increases alongside
follow.
this.
Thus, an increase in the cost of repairs 3. Suitable for Tax
of each subsequent year is Authorities: The method is
compensated by a decrease in the recognized and accepted by
amount of depreciation for each income tax authorities.
subsequent year.
Disadvantages of Declining
Balance Method
1. No Zero Value: The value of assets cannot be
brought down to zero under this method.
2. Rate Determination Is Not Easy: Determining
suitable depreciation rates is different and more
complex compared to the fixed installment method.
FORMULA
DEPRECIATION = BOOK VALUE X
DEPRECIATION RATE
BOOK VALUE = COST - ACCUMULATED
DEPRECIATION
SAMPLE PROBLEMs
PROBLEM #1
On January 2011, a Company purchased an
equipment at a cost of P140,000, having a life
span of 5 years.
The depreciation rate is 20% Calculate the
depreciation from 2011 to 2015 using Declining
Balance Depreciation Method. Also calculate the
salvage value of the equipment at the end of
the year 2015.
ANSWER P#1
BOOK VALUE IN
YEAR THE BEGINNING
DEPRECIATION
2011 140,000 (140,000)(20/100)=28,000
2012 140,000-28,000=112,000 (112,000)(20/100)=22,400
2013 112,000-22,400=89,600 (89,000)(20/100)=17,920
2014 89,600-17,920=71,680 (71,680)(20/100)=14,336
2015 71,680-14,336=57,344 (57,344)(20/100)=11,468.8
At the end of the year 2015, the SALVAGE VALUE=57,344- 11,468.8 = 45875.2
BOOK VALUE IN THE BEGINNING DEPRECIATION
140000
120000
100000
80000
60000
40000
20000
0
2011 2012 2013 2014 2015
PROBLEM #2
Engr. Miller group of companies decided to acquire a state-of-the- art production
machine that will cost Php 2,500,000. It will also require another Php 50,000 for
shipping and Php 65,000 for installation. Using standard Declining Balance Method at
8% annual rate, find:
a) the depreciation cost for its 3rd year of use.
b) the accumulated depreciation after 6 years.
c) the salvage value if it is expected to last for 15 years.
c) SV=FC(1-1)"
Where: n Economic Life = 15 years SV=FC(1-1) = 2,615,000 (1-0.08) 16 = Php 748.667.71
Thank
You
QUIZ
TIME
QUIZ TIME ( 20 PTS. )
On January 1, 2020, a company purchased a
vehicle at a cost of P200,000, with a life span
of 5 years.
The depreciation rate is 25%. Calculate the
depreciation from 2020 to 2024 using the
Declining Balance Depreciation Method. Also,
calculate the salvage value of the vehicle at
the end of the year 2024.
ANSWER
Solution:
Using the Declining Balance Depreciation
Method:
Depreciation = Book Value × Depreciation Rate
The book value decreases each year after
subtracting depreciation.
Year Book Value in the Beginning Depreciation
2020 200,000 (200,000 × 25/100) = 50,000
2021 200,000 - 50,000 = 150,000 (150,000 × 25/100) = 37,500
2022 150,000 - 37,500 = 112,500 (112,500 × 25/100) = 28,125
2023 112,500 - 28,125 = 84,375 (84,375 × 25/100) = 21,093.75
2024 84,375 - 21,093.75 = 63,281.25 (63,281.25 × 25/100) = 15,820.31
