Depreciation Methods

Depreciation Methods Depreciation is the accounting process of allocating the cost of tangible assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.
Factors Involved in the Depreciation Process

What depreciable base is to be used for the asset?
 What is the asset’s useful life?
 What method of cost apportionment is best for the asset? Depreciable Base for the Asset The base established for depreciation is a function of two factors: the original cost, and the salvage or disposal value.

Salvage value is the estimated amount that the company will receive when it sells the asset or removes it from service. It is the amount to which the company writes down or depreciates the asset during its useful life. Example: An asset is purchased for $10,000. The company believes that it has a salvage value of $1,000. Original cost $10,000 Less: Salvage value 1,000 Depreciation base$ 9,000 Methods of Depreciation The accounting profession requires that the depreciation method employed be “systematic and rational ”.
The following are examples of depreciation methods:

 Activity method (units of use or production). Straight-line method.
 Decreasing charge methods (accelerated):

a. Sum-of-the-years’ digits
b. Declining-balance method The following information will be used to illustrate each of the above methods: Stanley Coal Mines recently purchased an additional crane for digging purposes.

Cost of crane$500,000 Estimated useful life5 years Estimated salvage value$50,000. Productive life in hours30,000 hours. The activity method (also called the variable-charge or units-of-production approach) assumes that depreciation is a function of use or productivity, instead of the passage of time. A company considers the life of the asset in terms of either the output if provides (units it produces) or an input measure such as the number of hours it works. The crane Stanley purchased poses no particular depreciation problem. Stanley can measure the usage (hours) relatively easily. If Stanley uses the crane for 4,000 hours the first year, the depreciation charge is: (Cost less salvage value) X hours this year.
Total estimated hours ($500,000 – $50,000) X 4,000 30,000 = $60,000 Straight-Line Method. The straight-line method considers depreciation a function of time rather than a function of usage. Companies widely use this method because of its simplicity. The straight-line procedure is often the most conceptually appropriate, too. Stanley computes the depreciation charge for the crane as follows:
Cost less salvage Estimated service life $500,000-$50,000 5 =$90,000 Sum-of-the-Years’-Digits The sum-of-the-years’-digits method results in a decreasing depreciation charge based on a decreasing fraction of depreciable cost (original cost less salvage value).
Each fraction uses the sum of the years as a denominator (5+4+3+2+1=15). The numerator is the number of years of estimated life remaining as of the beginning of the year. In this method, the numerator decreases year by year, and the denominator remains constant. At the end of the useful life, the balance remaining should equal the salvage value.  Declining-Balance Method The declining-balance method utilizes a depreciation rate (expressed as a percentage) that is some multiple of the straight-line method. For example, the double-declining rate for a 10-year asset is 20 percent (double the straight-line rate, which is 1/10 or 10 percent). Unlike other methods, the declining-balance method does not deduct the salvage value in computing the depreciation base. For example, if Stanley chose to use the double-declining-balance method, the crane would depreciate at twice the rate of the straight-line rate.

Place your order
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
The price is based on these factors:
Academic level
Number of pages
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more

Order your essay today and save 15% with the discount code SUCCESS