Final answer:
The double declining balance method calculates annual depreciation by applying double the straight-line rate to the book value of the asset each year, excluding residual value. Residual value is accounted for in the final year to ensure total depreciation doesn't exceed the asset's cost minus residual value. It leads to higher early depreciation charges reflecting higher initial productivity of the asset.
Step-by-step explanation:
The double declining balance method of computing depreciation involves accelerating the rate at which an asset's value declines. According to this method, annual depreciation is calculated by taking double the straight-line depreciation rate and applying it to the asset's declining book value each year, excluding the residual value. However, the residual value is considered in the final year to ensure that the cumulative depreciation does not exceed the cost of the asset minus its residual value.
This method results in higher depreciation expenses in the early years of the asset's useful life and lower expenses as the asset ages. The primary reason for ignoring the residual value in the initial years is to match the expense with the revenue generated from the asset's higher productivity during those years. The final year adjustment ensures that the total accumulated depreciation aligns with the asset's residual value, preventing the asset from being depreciated below this predetermined salvage value.