Depreciation Methods

Depreciation is the process of allocating the cost of property, plant and equipment over the life of the asset.
Depreciation method should be rational and systematic.
Straight-line depreciation method allocates same amount of depreciation expense in each period.
Declining-balance depreciation method allocates more depreciation expense during the earlier periods and less depreciation expense during the later periods. Declining-balance depreciation method is an accelerated depreciation method.
Usage-based depreciation method allocates depreciation expense based on the usage of the asset during the period.

Straight-line Method
Depreciation expense = (Cost – Salvage value) x (1/ Useful life) x (# of months/12)

Double-declining Balance Method
Depreciation expense = Beginning book value x (1/Useful life x 200%)

Usage-based Method
Depreciation expense = (Cost – Salvage value) x (Units incurred during the current period / Total units expected from the asset)

Exercise 2
On September 1, 20×1, Company M purchased a building at $1,200,000.
Buildings are depreciated using the straight-line depreciation method.
Useful life of the building is 40 years.
Salvage value of the building at the end of useful life is estimated as $120,000
What is the amount of depreciation expense for 20×1?
What is the book value of the building at December 31, 20×1?

 Annual depreciation expense
= ($1,200,000 – $120,000) x (1/40) = $1,080,000 x (1/40) = $27,000
Depreciation expense for the period from September 1, 20×1 to December 31, 20×1
= $27,000 x (4/12) = $9,000
Book value of the building at December 31, 20×1
= $1,200,000 – $9,000 = $1,191,000


Exercise 5
On January 1, 20×1, Company G purchased equipment at $80,000.
Residual value (salvage value) at the end of useful life is estimated as $8,000.
The equipment was designed and manufactured to be used for 20,000 hours in production.
In 20×1, Company G used this equipment of 5,000 hours in production.
What is the depreciation expense for 20×1?

 Depreciation expense for 20×1
= ($80,000 – $8,000) x (5,000 hours / 20,000 hours)
= $72,000 x (1/4) = $18,000

 

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