To determine the depreciation expense each year using the declining-balance method, we need to understand the components and process involved in this method. The declining-balance method is an accelerated depreciation method that calculates depreciation based on a fixed percentage of the book value of the asset at the beginning of each year. Let's go through the details step-by-step:
1. Identify the Book Value: The book value of the equipment at the beginning of the year is crucial. This value represents the cost of the asset minus any accumulated depreciation from previous years.
2. Depreciation Rate: The declining-balance method uses a fixed depreciation rate, which is a percentage specified by the company’s accounting policy or relevant accounting standards.
3. Calculate Depreciation Expense: To find the depreciation expense for the year, multiply the book value at the beginning of the year by the depreciation rate.
So, the formula for calculating the depreciation expense (DE) using the declining-balance method is:
[tex]\[ \text{DE} = \text{Book Value at Beginning of Year} \times \text{Depreciation Rate} \][/tex]
Given the choices:
- Option A (interest rate): This is incorrect. The interest rate is not used in calculating depreciation.
- Option B (residual value): This is incorrect. The residual value is considered in the straight-line method but not directly multiplied in the declining-balance method.
- Option C (face value): This is incorrect. Face value is a term more commonly associated with financial instruments like bonds, not depreciation of assets.
- Option D (depreciation rate): This is correct. The depreciation rate is indeed the factor by which the book value is multiplied to calculate the depreciation expense in each period under the declining-balance method.
Therefore, the correct answer for calculating the depreciation expense each year using the declining-balance method is:
Option D: Depreciation rate.
