Question

Different depreciation methodologies: straight line depreciation, declining balance, units of production depreciation methods; should be able to compute the depreciation amount and journal entries using each of those methods.

Answer 1

STRAIT- LINE DEPRECIATION (SLM)

This is the most simplest and widely accepted mode of depreciation used. And it is most suitable for assets that generate revenue consistenly over their lives. and the SLM method give a fixed amount of depreciation for the whole period of the life of the asset disregarding the usage and efficiency of the asset.

SLM annual depreciation charge = Depreciable Base / Estimated Service Life

Example; ASSET VALUE =1000000, SALVAGE VALUE = 850000, LIFE = 7 years,or 70000 Units

annual depreciation = 1000000-150000/7 = 121428.57

journal entry

Depreciation A/C Dr 121428.57

Accumulated Depreciation A/C Cr 121428.57

DECLINING BALANCE (DBM)

this is just an add on for Straight Line Depreciation method, and DBM calculates the depreciation disregarding the salvage value.the double decline means the depreciation charging twice than the SLM.

Same Example: 1ST year of depreciation % =1/7*2= 0.2857 or 28.57%

=1000000*28.57% = 285700

journal entry

Depreciation A/C Dr 285700

Accumulated Depreciation A/C Cr 285700

UNIT OF PRODUCTION OR ACTIVITY METHOD

Activity method depreciates an asset by the amount that it is used.An assets use can be measured by input units ( e.g., number of hours used) or output units (e.g., number of output produced).

Activity methord depreciation charge = depreciable base* units produced or hours used / total units of production or total hours usable over life

Same Example; it the asset actually produces the 9500 units in the first year

=850000*9500/70000 = 115357.14

journal entry

Depreciation A/C Dr 115357.14

Accumulated Depreciation A/C Cr 115357.14

(Now commonly we charging the depreciation to the Accumulated Depreciation Account. It is an Contra Asset Account.)