Question
Ironclad Manufacturing purchased equipment and depreciates it using the double-declining-balance method. The equipment cost $100,000, has a 5-year useful life and a $10,000 residual value.
| Date | Event |
|---|
| January 1, 2025 | Purchased the equipment for cash. |
| December 31, 2025 | Recorded depreciation for the first year. |
| December 31, 2026 | Recorded depreciation for the second year. |
| December 31, 2027 | Recorded depreciation for the third year. |
Required: Prepare the purchase entry and the depreciation entries for 2025–2027. The DDB rate is 2 ÷ 5 = 40%, applied each year to the beginning-of-year carrying amount (ignore residual value until the final years).
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 16 — Property, Plant and Equipment
Depreciation spreads the depreciable amount — cost less residual value — over the asset's useful life. Establish the depreciable amount, the method and the period of ownership within the year before computing anything; a mid-year acquisition or disposal is charged only for the months held.
Common mistakes
- Deducting residual value under the reducing-balance method, where the rate applies to carrying amount instead.
- Charging a full year on an asset bought or sold part-way through the period.
- Continuing to depreciate an asset once its carrying amount has reached residual value.
Further readingStraight-line depreciation, worked