DEPRECIATION

Declining-Balance (DB) Method

In the DB method, sometimes called the constant-percentage method or the Matheson

formula, it is assumed that the annual cost of depreciation is a fixed percentage of the book
value at the beginning of the year.

Declining balance depreciation accelerates the write-off of asset value because the
annual depreciation is determined by multiplying the book value at the beginning of a year
by a fixed (uniform) percentage R (0 < R < 1), expressed in decimal form. If R = 0.1, then 10%
of the book value is removed each year. Therefore, the depreciation amount decreases each
year.

BV – Time Graph
of a DB Depreciation

Book Value for year k (BVk)

BVk = B(1 – R)k or BVk = BVk-1(1 – R)

where:
B = First cost or cost basis
R = Annual rate of depreciation
BVk-1 = Book value of the previous year
k = kth year (0 ≤ k ≤ n )

Salvage Value (SV)

SV = B(1 – R) n or SV = BVn-1(1 – R)
where:
B = First cost or cost basis
R = Annual rate of depreciation
BVn-1 = Book value of the previous year
n = recovery period
Depreciation for Year k (dk)

dk = R(BVk-1) or dk = R(B)(1 – R )k-1

where:
R = Annual rate of depreciation
BVk-1 = Depreciation of the previous year

Note: Depreciation for the first year (k = 1)

d1 = R(B)
where:
R = Annual rate of depreciation
B = First cost or cost basis

Total Depreciation (D)

D = B – SV
where:
B = First cost or cost basis
SV = Salvage value

Total Depreciation up to year k (Dk)

Dk = B – BVk
where:
B = First cost or cost basis
BVk = Book value for year k

Annual Rate of Depreciation (R)

R=1– or R=1–
where:
B = First cost or cost basis
SV = Salvage value
BVk = Book value for year k
k = kth year (0 ≤ k ≤ n )
n = recovery period
Sample Problem 1:
A construction equipment cost 180,000.00. It has a salvage value of 15,000.00 at the
end of 12 years. Find the 5th year depreciation using declining balance method.

Solution:
B = 180,000.00
SV = 15,000.00
n = 12
k=5

Annual Rate of Depreciation

R=1–
, .
R=1–
, .
R = 0.18704

Depreciation at the 5th year

dk = R (B) (1 – R)k-1
d5 = 0.18704 (180,000.00) (1 – 0.18704 )5-1
d5 =14,705.64

Sample Problem 2:
An equipment cost 600,000.00 and installation cost 50,000.00. It has a useful life of 8
years and annual rate of depreciation is 12%. Find the salvage value of the equipment and
the book value at the end of the 4th year.

Solution:
B = 600,000.00 + 50,000.00 = 650,000.00
R = 0.12
n=8
k=4

Salvage Value
SV = B(1 – R) n
SV = 650,000.00(1 – 0.12) 8
SV = 233,762.44

Book Value at end of 4th year

BVk = B(1 – R)k
BV4 = 650,000.00(1 – 0.12)4
BV4 = 389,801.98