Question

Discuss the 4 methods of depreciation. Which method is best for the hospitality industry? (400 words required. See direction sheet as a reminder for all directions)

please write your own thoughts and research.

Answer 1

Depreciation, which denotes cost of decay in the value of an asset, is a non-cash exenditure by nature.

04 Most common methods of depreciation are:

1.Straight-line method :: It is the most common and simplest method of computing depreciation. in this method,expence amount remains same over the usuful life-time of the asset . Formula applied for this mmethod is -- Depreciation= (Cost of asset-Salvage value)/ Useful Life

Example:: An asset has been procured at a cost of $50,000. Usuful life-time is 10 years and Salvage value at the end of the usfule life time is $5,000.    Then, Cost of depreciation expense for each year will be= ($50,000-$5,000)/10=4,500.

2. Double Declining Balance method :: This method reflects that assets are typically more productive in their earlier years than the latter years. In this method, depreciation factor is 2* that of depreciation expense under Straight-line method.    Formula applied in this method is= Beginning book value* Rate of depreciation

Example:: An asset has been procured at a cost of $5,00,000,with useful life of 10 years. Then,rate of depreciation will be= (100%/10)/2=20%. Amount of Depreciation will be :: 1st. year :: $5,00,000*20%=$1,00,000 2nd. year:: $(5,00,000-1,00,000)*20%=$80,000    3rd. year:: $(5,00,000-1,00,000-80,000)*20%=$64,000 and, so on.....

Please note that while in the first year,cost of procurment, i.e., $5,00,000 has been taken to compute cost of depreciation, from the 2nd.year onwards, depreciated value, i.e.,Cost of the previous year- Depreciation for the previous year, should be cosidered.

3. Units of Production method:: This method is applied to the assets involved in productions. It is based on the total no. of units produced/total no.of hours used by the machine, over its useful life.    Formula used for this method is= (Cost- Salvage)*(No.of units produced/ Useful Life in No.of units)

Example:: A machine has been procured at a cost of $50,000, with an estimated capacity of production of 1,00,000 units. It's salvage value is $10,000. During 1st.year, it produces 10,000 units. Then,cost of depreciation in the 1st.year will be=($50,000-$10,000)*(10,000/1,00,000)=$4,000.

4. Sum-of-the-Years-Digits method:: It is one of the accelerated depreciation method. Here also, a higher depreciation expence is incurred in earlier years, while lower in the latter years. In this method, remaining life of the asset is divided by the sum of the years and then multiplied by Depreciating base( Cost- Salvage value). Formula is :: (Cost- salvage value)*( Remaining life/Sum of the years)

Example:: An asset has been bought at a cost of $50,000, with useful life-time 5 years and salvage value $5,000.    Then, depreciation expence will be:: 1st.year:: $(50,000-5,000)*{{5/(5+4+3+2+1)}=$45,000*5/15=$15,000    2nd.year::$(50,000-5,000)*{{4/(5+4+3+2+1)}=$45,000*4/15=$12,000 and, so on.

In Hospitality industry, method of depreciation best suitable is Straight-line method.Hospitality industry involves huge amount of fund in construction of building with all probable amenities along-with equipments necesssary for boarding,lodging and fooding. This huge investment should be depeciated in Straight-line method over a shorter useful life, preferably not exceeding 10 years, and with a salvage value, too. This provides the Firm running such industry to re-model/re-vamp its infrastructure with changing demand of the society.