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Declining-Balance Depreciation Method Questions on Business Exams for Contractors

Recall that “Declining-Balance Depreciation” is one of the two depreciation methods used, with “Straight-Line Depreciation” being the other.

In straight-line depreciation, assets are depreciated by the same amount every year, for example, an asset with a useful life of 5 years depreciates or follows (straight-line):

”Year 1 to 5 Depreciation Base

How is Declining-Balance Depreciation calculated and why is it used?

Declining-balance depreciation is used because it better reflects the loss of value suffered by heavy equipment used in construction, which lose most of their value within a few years.

To calculate Declining-Balance Depreciation, follow these steps:

So, let’s look at a problem using the information below, evaluate the adjusted depreciation base for years 1 through 10.

Full cost = $60,000

Useful life (years) = 10

Salvage value = $10,000 | *Note this Salvage value is ignored when using the declining balance method

Declining-Balance Depreciation Percentage = 150%

*Note that this value is either given or you have the ability to find it during testing.

”Year_1_to_10_Declining_Depreciation_table

Notice that graphically, if the asset’s value is plotted with respect to time, the resulting curve has a more significant drop towards the beginning.

”Assets Value Graph”
graph not to scale for illustration purposes only.

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