Question

Give examples of three depreciation methods and their formulas. Explain why each would be used over the others.

1. Straight‐line
2. Declining‐balance
3. Units‐of‐activity

Answer 1

depreciation: depreciation is expense charged on the tangible fixed assets or reduction in the value of fixed assets due to the wear and tear and laps of time etc.

1)straight line method;

i)straight line method is one of the depreciation method ,according to this method the depreciation charged to asset is fixed .

ii) it is also called fixed installment method ,according this method the asset can be reduced to zero

iii) formula depreciation =( asset value -scrap value )/estimated life

double declining balance method :

I) it is one of the depreciation method , according to this method, the depreciation charged is based on the beginning book value of the every year .

ii)according this method the depreciation is very high in the early years and later on it was reduced gradually .

iii) calculation of double declining depreciation percentage = 200% / estimated life

3) units of activity method:

i)according to this method the depreciation charged is based on the total units produced in the year .

ii)according to this method estimate the total number of units produced of the asset over the entire life time of the asset .

iii) substract the scrap value from the asset value and divide asset value with number of units produced

depreciation per unit = (asset value -scrap ) total estimated units produced

example :

asset value = 100,000

scrap value = 10000

estimated life = 5years or 10000 units produced over the life time

1year units produced = 4000 units

solution

1) straight line depreciation =( 100000-10000)/5years

=$90000/5= 18000

2) double declining balance dep %= 200%/5=40%

depreciation = 100000*40%= 40,000

3) depreciation per unit =( 100000-10000)10000

=90000/10000=9 per unit

1 year depreciation = 9 per unit*units produced in the 1 year

= 9*4000

= $36000