University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

59

Pages:

2
Author:

stud_ice13

Depreciation Calculation Methods Depreciation is the systematic allocation of a plant asset’s cost over its useful life. Key factors in depreciation include: 1. Cost: Includes necessary expenditures to acquire and prepare the asset. 2. Salvage Value: The expected residual value at the end of the asset's useful life. 3. Useful Life: The period over which the asset will be used in operations. Three common methods for calculating depreciation are straight-line, units-ofproduction, and declining-balance. Depreciation Methods with Examples 1. Straight-Line Method Allocates an equal amount of depreciation to each period. • Formula: Depreciation Expense=Cost−Salvage ValueUseful Life • Example: A machine costs $22,000, has a salvage value of $2,000, and a 5year useful life. o Calculation: Depreciation Expense per Year=22,000−2,0005=4,000 o Yearly Depreciation: $4,000 2. Units-of-Production Method Depreciation expense varies with the asset’s usage, ideal for assets with fluctuating use. • • Steps: 1. Compute depreciation per unit: Depreciation per Unit=Cost−Salvage ValueTotal Expected Units 2. Multiply depreciation per unit by units produced each period. Example: The machine is estimated to produce 1,000 units over its life: o Depreciation per Unit: 22,000−2,0001,000=20 per unit o Annual Depreciation (based on production):  Year 1 (200 units): 200×20=4,000/200  Year 2 (400 units): 400×20=8,000/400  Year 3 (300 units): 300×20=6,000/300  Year 4 (80 units): 80×20=1,600/80  Year 5 (30 units): 30×20=600/30 3. Double-Declining-Balance (DDB) Method An accelerated method that applies a constant depreciation rate (double the straight-line rate) to the declining book value of the asset. • • Steps: 1. Compute the straight-line rate: 100%Useful Life 2. Double the rate for DDB. 3. Multiply by beginning-period book value, avoiding depreciation below salvage value. Example: o Straight-line rate: 100%5=20% o Yearly Depreciation:  Year 1: 22,000×0.40=8,80022,000  Year 2: (22,000−8,800)×0.40=5,280  Year 3: (22,000−8,800−5,280)×0.40=3,168  Year 4: Continue until book value reaches salvage value. Solution - Part 2: Change in Estimates For assets where useful life or salvage value estimates change, depreciation is recalculated based on the remaining book value, revised useful life, and salvage. • Example: Equipment costing $3,800 with an initial 3-year life and $200 salvage value is revised in year three to a 4-year life with zero salvage. o Annual Depreciation Years 1–2: 3,800−2003=1,200 o Book Value at Start of Year 3: 3,800−(2×1,200)=1,400 o Revised Annual Depreciation: 1,400−02=700 Each method aligns expenses with the asset’s usage pattern: • • • Straight-line: Equal distribution over time. Units-of-production: Matches usage variability. Declining-balance: Higher expenses in early years, suitable for assets that lose value more quickly initially.