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Analysis Of Depreciation Methods

By:   |   Jul 08, 2018   |   Views: 16   |   Comments: 0

Depreciation is a systematic and rational process of distributing the cost of tangible assets over the life of assets.
Depreciation is a process of allocation.
Cost to be allocated = acquisition cot - salvage value
Allocated over the estimated useful life of assets.
Allocation method should be systematic and rational.


Depreciation methods based on time
Straight line method
Declining balance method          
Sum-of-the-years'-digits method

Depreciation based on use (activity)

STRAIGHT LINE DEPRECIATION METHOD:

Depreciation = (Cost - Residual value) / Useful life

On April 1, 2011, Company A purchased an equipment at the cost of $140,000.  This equipment is estimated to have 5 year useful life.  At the end of the 5th year, the salvage value (residual value) will be $20,000.  Company A recognizes depreciation to the nearest whole month.  Calculate the depreciation expenses for 2011,  2012 and 2013 using straight line depreciation method.  

Depreciation for 2011
= ($140,000 - $20,000) x 1/5 x 9/12 = $18,000

Depreciation for 2012
= ($140,000 - $20,000) x 1/5 x 12/12 = $24,000

Depreciation for 2013
= ($140,000 - $20,000) x 1/5 x 12/12 = $24,000

DECLINING BALANCE METHOD:

Depreciation = Book value x Depreciation rate
Book value = Cost - Accumulated depreciation

Depreciation rate for double declining balance method
= Straight line depreciation rate x 200%

Depreciation rate for 150% declining balance method
= Straight line depreciation rate x 150%

On April 1, 2011, Company A purchased an equipment at the cost of $140,000.  This equipment is estimated to have 5 year useful life.  At the end of the 5th year, the salvage value (residual value) will be $20,000.  Company A recognizes depreciation to the nearest whole month.  Calculate the depreciation expenses for 2011,  2012 and 2013 using double declining balance depreciation method.  

Useful life = 5 years  -->  Straight line depreciation rate = 1/5 = 20% per year

Depreciation rate for double declining balance method 
= 20% x 200% = 20% x 2 = 40% per year

Depreciation for 2011
= $140,000 x 40% x 9/12 = $42,000

Depreciation for 2012
= ($140,000 - $42,000) x 40% x 12/12 = $39,200

Depreciation for 2013
= ($140,000 - $42,000 - $39,200) x 40% x 12/12 = $23,520

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