Question

Which Depreciation Method Should We Use?

Atwater Manufacturing Company purchased a new machine especially built to perform one particular function on the assembly line. A difference of opinion has arisen as to the method of depreciation to be used in connection with this machine. Three methods are now being considered:

(a)The straight-line method

(b)The productive-output method

(c)The sum-of-the-years’-digits method

List separately the arguments for and against each of the proposed methods from both the theoretical and practical viewpoints.

Answer 1

It is said that the new machine which is built to perform one particular function on the assembly line.

Three methods were being considered:

Straight Line Method:

It is used mostly for financial reporting purpose by the companies. It assumes same cost base and a constant rate of depreciation over the entire life of the asset. It is simple to calculate. But in this case this method may not be rational to apply.

Productive-output Method:

It is a depreciation method based on the production units produced by the machine. Since the machine is used for performing one particular function on the assembly line, this method is more appropriate. Here depreciation is calculated per unit of production. Depreciation per unit of production is constant and the amount of depreciation differentiates with the difference in the activity level.

Sum-of-the-years-digits method:

It is a type of accelerated depreciation methods. Mostly companies use accelerated depreciations to reduce their taxes by showing lesser tax income. Hence this method is not preferrable in this case.

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The most preferrable method in this case would be Productive-output method.

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Hope this is helpful!!