Question

Identify the deprecation methods and which depreciation method would be most useful for a company that wants to match more of the cost of the asset with revenues generated from the asset in the early years of asset use.

*All popular methods.

Answer 1

Answer 1:

The various methods of depreciation are as follows:

1. Straight-line Method
2. Double Declining Balance Method
3. Units of activity Method
4. Hours Method

Straight Line Method:

Depreciation (as per SLM) = (Cost - salvage value) / Number of years

In this method, depreciation is same in all the years, and the book value reduces at a constant rate every year.

Double-Declining Method:

Depreciation Rate (as per double declining method) = 100 / Years * 2

In this method, the depreciation is high in earlier years, and then depreciation reduces in later years.

Units of Activity Method:

Depreciation rate (as per Units of production method) = (Cost - salvage value) / Total expected units

In this method, depreciation is based on number of units produced. If the units produced are high, the depreciation is also high.

Hours Method:

Depreciation rate (as per Hours method) = (Cost - salvage value) / Total expected hours

As per Hours Method, depreciation is based on number of hours worked. If the hours worked are high, the depreciation is also high.

Answer 2:

Double declining Balance Method

Explanation:

In double declining balance method, the depreciation calculation is based on number of units produced. If the units produced are high, the depreciation would also be high.

In this method, the company can match more of the cost in early years.

In case of any doubt or clarification, feel free to come back via comments.