- CFA Exams
- CFA Exam: Level I 2021
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 26. Long-lived Assets
- Subject 3. Depreciation Methods

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**CFA Practice Question**

Filer Brother Imports, Inc. purchased a new conveyor belt system for ($40,000 to use in its warehouse). The company uses double-declining balance (DDB) depreciation. The conveyor system has an estimated life of five years and a salvage value of five percent or $1,500. What is the depreciation expense on the conveyor belt system in the second year of its estimated life?

B. $9,240

C. $9,600

A. $6,400

B. $9,240

C. $9,600

Correct Answer: C

The computation is $24,000 book value at the beginning of year 2 x 40% = $9,600. The $24,000 book value equals $40,000 - (40% x $40,000). Salvage is not used.

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**User Contributed Comments**
15

User |
Comment |
---|---|

stranger |
In double declining method we do not consider the salvage value and the expected life being 5 years the rate of depn becomes 2*(100/5) i.e. depn yr 1 is $40,000 * 0.40 = $16,000 depn yr 2 is $24,000 * 0.40 = $9,600 |

kalps |
Yes you do need to be aware of the salvage value as the amount of depreciation charged in the year cannot surpass the or eat into the salvage value so do not ignore it altogether old boy. |

vincenthuang |
rate = 2/n= .4 |

rainatt |
(2/N)book value of beginning of the year. beginning book value of year 2=40,000*(1-40%)=24,000, |

katybo |
yr 1 : 2/5 * (40.000-0) = 16.000 yr 2 : 2/5 * (40.000-16.000) = 9.600 |

thekapila |
on BA11 2nd DEPR 2nd SET DBX: 200 INS! LIFE 5 YR DOWN ARROW CST 80000 DOWN ARROW SAL: 1500 DOWN ARROW DEP: 9600 |

cong |
Depreciation rate of the double-declining rate = 2 * depreciation rate for the straight-line method. |

shiva5555 |
Thank you calculator. |

fmhp |
NO SALVAGE VALUE for double declining method! |

quanttrader |
DDD(2) = (2/n) x BV(0)(1-2/n) |

moneyguy |
katybo has it! One minute calculation. Save 30 seconds for something else. Thanks! |

jonan203 |
HP12C 40,000 <enter><enter> 2 <enter> 5 <divide><times><minus> .40 <times> |

Shaan23 |
I like to thank all you guys who cause the pass rate to be lower due to your excessive need to use the calculator and not understand logic. |

Inaganti6 |
@Shaan23 whether someone else passes or not has no bearing on your business as it's not a curved exam. Mind your business. |

khalifa92 |
double decline method 2/estimated life = depreciation % here its 2/5=0.4 thus reducing 0.4 of BV each year. |