 Hello in this lecture, we will continue calculating depreciation. We are now going to move on to the double declining method We have in a previous lecture taking a look at the straight line method We're going to use the same numbers here and plug them into a similar problem working the double declining method We're going to look at the pros and cons and the differences in the calculations between these two methods and See what those will be. We're going to use these numbers over here We're going to put the calculation for depreciation into this area here We'll then put that into a shortened worksheet in order to see what the depreciation will be For each year in this case four years and then we'll calculate the book value for each of those four years Then we want to actually see this in context in terms of what will the journal entry be for each of those four years And how will that look on the trial balance in relation to other accounts? What's the effect on net income? What's the effect on assets? How does it look in context? So that will be what we will take a look at at this time. The information we have is over here We have the equipment costing 257 5 we bought it on january 1st So we bought it right at the beginning of the year so we do not have to worry about a mid-year convention in this case We're going to say that there's an estimated salvage value of 20 000. What is the salvage value? That means that at the end of four years in this case because the next one says the useful life is four years That's how long we believe the the Equipment will be used for so if it's a forklift or something like that We would have it for four years And then We would say that we would scrap it So even if it's not useful at the end of that four years Even if the usefulness of it is gone as a function in forklift in that example then We could still just sell it for the metal and the parts and whatnot That's what's called the salvage value And then we're going to have we see that we have the estimated units of production We're not going to worry about that at this time We will be using this information in the next example when we take a look at units of production And that will be an alternative way sometimes a more sophisticated way actually to better allocate cost in some way But of course you need this extra information to do that Which is costly to do and therefore some many times will actually estimate based on Time rather than performance And therefore we're also going to have this one piece of information do not depreciate the equipment below the salvage value So once again, what why is that? Why wouldn't we depreciate it through below the salvage value? Well, if we just think about what if there was no salvage value What if we thought that at the end of the four year useful life? It had zero salvage We would just have to throw it away then You can see it's pretty clear at that point then it would be not making sense for us to depreciate Beyond the 257 5 cost because if we did so then we would actually have a book A piece of equipment like a forklift on the books that not only has a zero value But it has a negative value and we could still be using that equipment So we can't really depreciate something below the cost, of course And if we think that we're going to sell it for 20,000 That's the new floor instead of zero being the floor 20,000 is the floor We can't depreciate but below the 20,000 because we believe that we can sell it just for scrap and whatnot Even if it's not functioning After at 20,000 therefore we need to stop the allocation. All right, so we're going to do that the calculations over here Once again, we're going to do the calculations in a bit of a longer format I do recommend setting it up in this kind of longer format way Because it can really give you a systematic way of calculating these You really want to get a system of calculating it so that when you look at different problems You can calculate it in the same way Note that these types of problems could ask you for the depreciation expense could ask you for the book value could ask you for the accumulated depreciation and therefore we want to set our problem up in such a way that we can Calculate whatever is asked for in an in an easy way And instead of us having shortcuts that basically calculate one piece of the equation And will not work for us in other pieces of the equation Also, we want to get the big picture Outlook in terms of what is really happening And if we do the full calculation in this way and kind of see all the relevant pieces of it That will make it a little bit more clear Of course after you do this you you may find some other ways that you want to calculate it You don't have to write out the entire thing every time But just remember if you do something in a linear formula Oftentimes it could be a lot more difficult to go back and look at it and say, okay Why is this long formula in the format that it's in If you do a calculation systematically kind of in a calculator one a calculation at a time Write those down then it's a lot easier oftentimes to go back and say I see what the work is happening here So you want to put your work in a way one that you get the right answer But two in such a way that you can go back to it Look at it and three you really want to put it in a way that you can set up other problems That may even at be asking for different information With the same format so that you can memorize the format of the problem So in this case, we're going to start with your one's depreciation We're going to start off the same as we did last time with the cost and the cost will be in this case I'm not going I'm just going to type it in there the 257 five So that's what we bought this equipment for And now last time we subtracted out the salvage value you'll recall in calculating the straight line method We are not going to do that for the accumulated depreciation method And this will kind of become apparent as we go But the first thing we will do is I'm going to calculate the straight line rate I'm going to do the straight line rate the long way and then show you how to do a shortcut way to do that So I'm going to take the cost divided by four years So I'm going to divide it by the number of years in the useful life this icon Of course here means division in the when we're talking about a Keyboard so I'm going to divide I'm just going to put in the four and so I'm going to write that out I'm going to show that we're going to take this divided by that and that will give us The straight line depreciation if there was no salvage value So this will give us the straight line depreciation if there was no salvage value So I'm going to do that calculation. I'm going to say it's the 257 five divided by four years So therefore if we had no salvage value of the 20 000 and we just calculated straight line depreciation We would depreciate 63 64 3 75 now once again Remember that under the street lamp method we did have salvage value and we took that out before dividing by four So keep that distinction in mind The reason we're doing this in this format this way is because we're just trying to get the straight line method Without the salvage value so that we can get the straight line rate and then double it So that would be the depreciation now we're going to have to figure out Well, what percentage of the of the cost is that so that we can get the straight line rate and then double it So in order to do that, I'm going to write that I'm going to divide it by the cost Remember the cost is just this number up here. So I'm just going to say it's the 257 five And I'm just going to take the rate and divide it by the cost And what we're going to do is I'm going to say that's equal to the straight line percent if there was no salvage value So let's do this calculation. I'll try to explain this a bit more. I'm going to say this equals the 64 3 75 divided by which is the slash the 257 five and enter that gives us a 25 percent Note that the reason it became a percent in this case if I go to the home tab And I go to the numbers group is because we formatted it as a percentage here So if it was formatted in some other way such as a number It would look by 0.25 make it a percent move the decimal over two places 25 percent Also, note that if it does not come out even if you're not divided by four in this case or then You could have decimals and you want to check that decimal function If something looks a little off in terms of rounding errors in that case So what we're really saying is that the straight line rate Uh, we we know that if we just divide by four we get to 64 3 75 if I want to think about that in terms of a rate. What is the straight line rate? It's the 257 five times 0.25 So so that's going to give us the 64 3 75 So that means the straight line rate is 25 percent in this case Which makes sense because it's four years 25 a year is how much we're going to depreciate over the useful life of four years Now that we have that and we say that we're going to say, all right Well, then we're going to use the double declining method Therefore we're going to multiply times two in order to double the rate so that we can then be on the double declining method Therefore if we multiply that out, it's going to equal the 25 percent times two Which of course will be The 50 percent so the double decline rate will be 50 percent. Why because the straight line rates 25 Therefore we're going to double it and get to 50 percent now that we've done that in a very long way I'm going to show you kind of a shortcut to do that and get the double decline rate in a quicker way Uh, in order to do that we would start off with basically, uh, just one I'm just going to start off with one and then divide it by the number of that number of years happens to be four in this case It's going to be a useful life of four years number of years for the useful life And this calculation will give us the straight line rate So i'm going to say this equals the one the one over four the one fourth gives us that 25 percent Once again, it's a percent because the cell is formatted in the home tab Numbers group as a percent and that gives us the same 25 percent So we can calculate that in these two ways. It's kind of the quick way to calculate it Uh, in order to get that 25 percent then of course, what are we going to do? We're going to double it Therefore we're going to multiply it times two And that will give us our double decline rate. So it's going to be the 25 percent times two There you go, and we have that information there now If you wanted to go back and clean this up and put some underlines in it You could do that by going to the home tab font group and we're going to underline that and then it equals here And then we're going to divide here and we could underline that if we so choose And then we're going to have this times this and then we're going to underline this for the calculation And then the bottom line number you may want to double underline So we could go to the drop down here and say that i'm sorry the drop down here And say that we want a double underline And once again, you could of course do the same type of activity here You would say that we're going to underline here. That's how we got to the 25 25 times two Underline that is how we come down to the 50 Percent which you could double underline and say that's the bottom line number So there's a different kinds of formats you could