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.

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

Depreciation expense = Beginning book value x (1/Useful life x 200%)

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

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 as120,000
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

On January 1, 20×1, Company G purchased equipment at 80,000.
Residual value (salvage value) at the end of useful life is estimated as8,000.
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