﻿ Analysis Of Depreciation Methods

# 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 methodÂ Â Â Â Â Â Â Â Â Â
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.Â  This equipment is estimated to have 5 year useful life.Â  At the end of the 5th year, the salvage value (residual value) will be \$20,000.Â  Company A recognizes depreciation to the nearest whole month.Â  Calculate the depreciation expenses for 2011,Â  2012 and 2013 using straight line depreciation method.Â Â

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

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

Depreciation rate for double declining balance methodÂ
= 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

Thank you!

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