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For financial-reporting purposes, a company transfers a portion of a car’s cost from the balance sheet to the income statement as an expense each year through a process called depreciation. This reduces the car’s value to account for the amount of benefit received from using the car. The double-declining-balance depreciation method allocates more of the car’s cost as an expense in the earlier years of the asset’s life. You can calculate the double-declining-balance depreciation expense of a car to see how much its value is decreasing on a balance sheet, which is different than its actual market value.
Determine the total cost of the car, including any costs to prepare it for use in a business, and the expected number of years of use -- called its useful life. Also determine the expected value of the car at the end of its useful life, called salvage value. For example, assume the total cost of the car is $10,000, the useful life is four years and the salvage value is $2,000.
Divide 1 by the car’s useful life. Then multiply the result by 2 to calculate the annual rate of depreciation. In this example, divide 1 by 4 to get 0.25. Then multiply 0.25 by 2 to get an annual rate of depreciation of 0.5.
Multiply the annual rate of depreciation by the car’s total cost to calculate the first year’s depreciation expense. In this example, multiply 0.5 by $10,000 to get $5,000 for the first year’s depreciation expense.
Subtract the first year’s depreciation expense from the car’s cost to calculate its book value at the beginning of the second year. In this example, subtract $5,000 from $10,000 to get a $5,000 book value at the beginning of the second year.
Multiply the depreciation rate by the book value at the beginning of the second year to calculate the second year’s depreciation expense. Then subtract the depreciation expense from the beginning book value to calculate the book value for the beginning of the third year. In this example, multiply 0.5 by $5,000 to get $2,500 in depreciation expense. Then subtract $2,500 from $5,000 to get a $2,500 book value at the beginning of the third year.
Subtract the car’s salvage value from its book value at the beginning of the third year to determine the remaining amount that can be depreciated. You cannot depreciate an asset below its salvage value. In this example, subtract $2,000 from $2,500 to get $500 in remaining depreciable value.
Multiply the depreciation rate by the book value at the beginning of the third year to calculate the third year’s depreciation expense. Compare it to the remaining depreciable value. If the depreciation expense is larger than the remaining depreciable amount, use the remaining depreciable amount as the third year’s depreciation expense. In this example, multiply 0.5 by $2,500 to get a $1,250 depreciation expense, which is larger than the $500 remaining depreciable value. So use $500 as the third year’s depreciation expense, which leaves $2,000 as the car’s book value, which is the same as its salvage value.
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