Case Study Essay

860 Words Mar 1st, 2014 4 Pages
Straight-line Method of Depreciation

In straight line depreciation method, depreciation is charged uniformly over the life of an asset. We first subtract residual value of the asset from its cost to obtain the depreciable amount. The depreciable amount is then divided by the useful life of the asset in number of accounting periods to obtain depreciation expense per accounting period. Due to the simplicity of the straight line method of depreciation, it is the most commonly used depreciation method.

Examples:

Example 1: On Jan 1, 2011 Company A purchased a vehicle costing $20,000. It is expected to have a value of $5,000 at the end of 4 years. Calculate depreciation expense on the vehicle for the year ended Dec 31, 2011.
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Calculate the depreciation for the first year of its life using double declining balance method.

Solution
Straight-line Depreciation Rate = 1 ÷ 5 = 0.2 = 20%
Declining Balance Rate = 2 × 20% = 40%
Depreciation = 40% × $20,000 = $8,000

Double Declining Balance Depreciation Method
Double declining balance depreciation method is a type of declining balance depreciation method in which depreciation rate is double the straight-line depreciation rate. For straight-line depreciation rate of 8%, double declining balance rate will be 2 × 8% = 16%.

Example

The salvage value of the copy machine is $200.00. The depreciation would be calculated as follows:

Year Depreciable
Basis Depreciation
Calculation Depreciation
Expense Accumulated
Depreciation
1 4,217.75 4,217.75 * 0.4 1,687.10 1,687.10
2 2,530.65 2,530.65 * 0.4 1,012.26 2,699.36
3 1,518.39 1,518.39 * 0.4 607.36 3,306.72
4 911.03 911.03 * 0.4 364.41 3,671.13
5 546.62 546.62 * 0.4 218.65 3,889.78
This calculation is exactly the same as the initial example. At the end of the useful life the book value of the copy machine is $327.97. The book value is larger than the salvage value so there is no change to the calculation.

Sum of the Years' Digits Method of Depreciation Sum of the years' digits method of depreciation is one of the accelerated depreciation techniques which are based on the assumption that assets are generally more productive when they are

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