Depreciation Based on Actual Use The calculations for depreciation based on actual use are similar to those used for calculating straight-line depreciation. Depreciation based on use is sometimes referred to as units-of-production, units-of-service, or output-based depreciation. The major difference between depreciation based on use and on the straight-line method is in the determination of the useful life of the asset and in the basis for the annual depreciation charge. Depreciation based on use estimates the life of the asset according to some measure of use instead of the passage of time, and the annual depreciation charge is based on the amount of use per period. The measure of use can vary with the type of asset involved. For example, automobiles and trucks might have service lives estimated by the number of miles traveled and aircraft engines might be estimated by hours of operation. Service lives of other equipment, such as printing presses or copying machines, might be estimated by the number of impressions or copies. The formula for depreciation based on use is: For example, assume that the asset acquired by Paul Company described above had an estimated useful life of 100,000 units of output. The original cost of $5,000 and the residual value of $500 result in a depreciation base of $4,500. The depreciation base of $4,500 divided by the useful life of 100,000 units of output results in a depreciation charge of $0.045 (4½ cents) for each unit of output. If the actual operation of the machine during its first year of ownership resulted in 22,000 units of output, the depreciation charge for that year is $990 (22,000 x $0.045). This depreciation charge is recorded in the usual manner as a debit to Depreciation Expense and a credit to Accumulated Depreciation. The depreciation process will continue in subsequent years until the original estimate of 100,000 units of output is reached; at that time the remaining book value of the equipment is $500, which is the original estimated residual value. Accelerated Depreciation Methods The two other methods of depreciation illustrated are referred to as accelerated depreciation methods. They are termed accelerated methods because a relatively larger amount of depreciation expense is recorded in the earlier years of the asset's life than would be recorded if the straight-line method were used. Accelerated depreciation methods are used when the circumstances suggest that the actual depreciation pattern is not straight-line. For example, many assets, such as automobiles and trucks, typically lose a large part of their service value in the early years of life. Although depreciation is strictly a cost allocation process and does not attempt to reflect market value, some companies prefer to reflect relatively realistic changes in asset service value in their accounting records. Accelerated methods of depreciation were also once popular for income tax purposes but have generally not been allowed for assets acquired after 1981. A modified form of accelerated depreciation permitted for tax purposes will be discussed briefly below. The two most popular accelerated depreciation methods are sum-of-the-years' -digits depreciation and declining-balance depreciation. Under sum-of-the-years'-digits depreciation, the annual depreciation charge is calculated by using a series of fractions. The numbers for the fractions are based on the estimated life of the asset. The denominator of each fraction is obtained by taking the useful life of the asset in years and counting backward. For example, for a fiveyear asset life, the denominator is 15 (5+4+3+2+1). For an asset with a 10-year life, the denominator is 55 (10+9+8+7+6+5+4+3+2+1).' The numerator for the fraction for the first year is the largest number-the life of the asset in years. Thus, for an asset with a five-year life, the fraction for the first year is 5. For each subsequent year, the numerator is reduced by one. For an asset with a five-year life, the fractions for the second through fifth years of life are ¼5, ¾5, ¾s, and ⅒s, respectively. These fractions are multiplied by the depreciation base (original cost less estimated residual value to obtain the annual depreciation charge. For the asset purchased by Paul Company on January 1, 1993, at a cost of $5,000 with an estimated residual value of $500 and an estimated life of five years, the first-year depreciation charge using sumof-the-years'-digits depreciation is $1,500 (55 × $4,500). The complete depreciation schedule for this asset using sum-of-the-years'-digits depreciation is contained in Exhibit.