Question

Explain in detail how to compute each of the following depreciation methods: straight-line, units-of-production, and double-declining-balance.

Answer 1

• Straight line basis is a method of calculating depreciation and amortization, the process of expensing an asset over a longer period of time.
• It is calculated by dividing the difference between an asset's cost and its expected salvage value by the number of years it is expected to be used.
• Straight line basis is popular because it is easy to calculate and understand, although it also has several drawbacks.
• Straight Line Basis = (Purchase Price of Asset - Salvage Value) / Estimated Useful Life of Asset

Units of production:-

• The unit of production method can produce different depreciation expenses in any given year since it's tied to unit production levels, unlike straight-line or other depreciation methods.
• This method allows companies to show higher depreciation expense in more productive years, which can offset other increased production costs

DE=[Estimated Production Capability(Original Value − Salvage Value)​]×Uwhere:DE=Depreciation ExpenseU=Units per year​

Double declining balances:-

Double declining balance method is a form of an accelerated depreciation method in which the asset value is depreciated at twice the rate it is done in the straight-line method. Since the depreciation is done at a faster rate (twice to be precise) of the straight-line method it is called accelerated depreciation.

However, accelerated depreciation does not mean that the depreciation expense will also be higher. The asset will depreciate by the same amount however it will be expensed higher in early years of its useful life while the depreciation expense will be lower in the later years of as compared to the straight-line method of depreciation.

• Double Declining Balance Method Formula = 2 X Cost of the asset X Depreciation rate or
• Double Declining Balance Formula = 2 X Cost of the asset/Useful Life