Hey 7mate is a private company and it has purchased a printing machine in 2019. The...

Hey 7mate is a private company and it has purchased a printing machine in 2019. The company management would like to consult someone who is sufficiently knowledgeable on depreciation methods before choosing an appropriate method for depreciating the machine. They approached you for an advice and you are required to outline the impact of double declining method compared with straight line method of depreciation on financial statement analysis.

Expert Solution

Double declining method is a method also called accelerated method of depreciation as expneses towards depreciation in financial statements recorded at accelerated pace as compare to straight line method which records a similar amount of expense as depreciation every year till the life of the asset.

Depreciation under double dclining method = 200% of straight line depreciation percent * book value of the assets

Straight line depreciation = (original value - salvage value of assets if any ) / Life of the asset

For example value of the asset purchased in 2009 is $100,000 and life of the asset is 5 years then with no salvage value then straight line dpreciation will be 100000/5 = 20,000 each year therefore rate will be 20%. Accordingly depreciation under double declining method will be twice of 20% which is 40,000 for first year, 24,000 for second year (40% of book value = 100,000 - 40,000) and so on.

In financial statements depreciation is an non-cash expense which decreases the net income of the company and value of the assets in financial statements is also decreased by the depreciation.

Under double declining method of depreciation a lower net income will be reported in financial statements in initial years as compare to net income derived by recording depreciation under under straight line method. A consistent positive net income is always excellent for the growth of the company in long run therefore it is advisable to use striaght line method to keep financial statements of the company healthy also the book value of assets will not diminish at rapid pace and will reflect higher value in intitial years under straight line method.

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