Question

For financial accounting purposes, there are four commonly used depreciation methods. MACRS is not allowed under GAAP - only for income tax purposes. What are the four methods? How is depreciation calculated under each method? What would be the journal entry for recording deporeciation expense for each method?

Answer 1

There are four types of depreciation methods .They are

1. Straight line

  Formula = (Cost – Salvage ) / Useful life

  example = cost of asset $35,000 with an estimated useful life of 7 years and salvage value 0

depreciation expense = $(35000-0)/7 = $5000 p.a

2. Units of production

Formula = (Number of units produced / Life in number of units) x (Cost – Salvage value)

  example = cost of asset $25,000, with an estimated total unit production of 100 million and a $0 salvage value. No of units produced 3 million units.

  depreciation expense = (3 million / 100 million) x ($25,000 – $0) = $750

3. Sum of year digit

Formula = (Remaining life / Sum of the year's digits) x (Cost – Salvage value)

example = cost of asset $25,000 and has an estimated useful life of 8 years and a $0 salvage value.

Depreciation Base = Cost – Salvage value = $25,000 – $0 = $25,000

The remaining life is the remaining life of the asset only. Like in beginning its 8 year than in following month 7 and so on.RL / SYD I.e 8 / 36 = 0.2222, is calculated like this. RL / SYD *depreciating base determines the expense for that year. The same process for the remaining years. RL / SYD at the beginning of year 2, would be 7 / 36 = 0.1944. and 0.1944 x $25,000 = $4,861 expense for year 2.

4. Double declining balance method

Formula = Beginning book value x Rate of depreciation

  example = cost of assets $250,000, with an estimated useful life of 4years and a $2,500 salvage value.

  depreciation expense =

The beginning book value = book value at year 1 and salvage value is filled in at the end of year 4.

The rate of depreciation calculated as (100% / Useful life of asset) x 2 i.e (100% / 4) x 2 =50% . rate of depreciation * beginning book value is the expense for that year like $25,000 x 50% = $12500 depreciation expense. (beginning book value to arrive - expenses =ending book value )like $25,000 – $12500 = $12500.The ending book value is beginning book value for the following year. (the year 1 ending book value of $12,500 would be the year 2 beginning book value) .

Journal entry

Depreciation expenses a/c Dr xxx

To Asset A/c xxx ( at net value after deducting depreciation )