Question

How many of the following depreciation methods result in reporting larger depreciation expense in the early years of asset ownership than is reported in the later years?

Answer 1

The methods of depreciation which results in larger depreciation expense in the early years of asset ownership than is reported in later years will include:-

1. Written down value method- Under this method depreciation is charged on the written down value of asset at the beginning of current year carried forward from previous year which will decrease year on year due to depreciation as a result of which depreciation expense year on year also decreases.

For example:- Lets suppose, X has purchased an equipment at a cost of $5000 on Jan 1,2020. The asset is being depreciated @ 10% on Written down value method. Then the depreciation for first year will be $ 500 (5000*10%) and depreciaiton for second year will be $450 ([5000-500)*10%]. Hence, we can see from the example that how depreciation expense for second year has been reduced in this method.

2.Sum of years digit method- Under this method depreciation is charged in the proportion of sum of total useful life of asset taking the numerator for initial years starting as last year of useful life of asset in reverse order thereby having more charge of depreciation in initial years.

For example:- Lets suppose, Y has purchased an equipment at a cost of $15000 on Jan 1,2019. The useful life of the asset is 5 years.

Hence depreciation can be calculated as:-

sum of years=1+2+3+4+5=15

Depreciable amount=$15000

Hence depreciation for 1st year will be=15000*5/15=$5000

Depreciation for 2nd year will be=15000*4/15=$4000

Hence, we can see from the example that how depreciation expense for second year has been reduced in this method.

3.Double declining balance method- Under this method asset is depreciated at the double rate and depreciation for subsequent years is computed on written down value at the beginning of current year carried forward from previous year which will decrease year on year due to depreciation as a result of which depreciation expense year on year also decreases.

For example:- Lets suppose, X has purchased an equipment at a cost of $10000 on Jan 1,2020. The asset is being depreciated @ 10% on Double declining value method. Then the depreciation for first year will be $ 2000 (10000*10%*2) and depreciaiton for second year will be $1600 ([10000-2000)*10%*2]. Hence, we can see from the example that how depreciation expense for second year has been reduced in this method.