Future Business Leaders of America (FBLA) Accounting Practice Test

What is the double-declining balance method of depreciation?

1. A method that applies a variable depreciation rate

2. A depreciation method that calculates using fixed book value

3. A method that multiplies the book value by a constant rate

4. A method that equally spreads cost over the asset's life

The correct answer is: A method that multiplies the book value by a constant rate

The double-declining balance method of depreciation is a way to allocate the cost of an asset over its useful life more aggressively in the earlier years. This method works by multiplying the book value of the asset at the beginning of the year by a constant rate, which is typically double the straight-line depreciation rate. By employing this approach, the depreciation expense is higher in the initial years and decreases over time, reflecting the way many assets tend to lose value more quickly at the start of their useful life. This is particularly relevant for assets that provide more utility and generate more revenue in their earlier years of usage. To implement this method correctly, one first determines the straight-line depreciation rate, doubles it, and then applies this rate to the remaining book value of the asset each year. This process continues until the asset's book value reaches its salvage value, ensuring that the depreciation does not exceed the actual cost of the asset. This method stands out because it does not just apply a fixed depreciation amount or an even spread over the asset's useful life, but rather accelerates depreciation, acknowledging the variable nature of asset usage and value.