# Methods of Depreciation by mikeholy

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```									Methods of Depreciation

1)   Straight-Line

•    assumes that the asset will contribute to earning revenue
equally during each period
•    depreciation expense is the same for every year of the
asset’s useful life
•    Annual Expense:          Cost - Salvage Value
Estimated Useful Life

2)   Units of Output

•    an equal amount of depreciation is charged for each unit
produced
•    appropriate when the amount of use of an asset varies
from period to period
•    suitable only when units of output over asset’s entire
useful life can be estimated with reasonable accuracy
•    Annual Expense: Cost - Salvage Value          * # of units
Number of Units of          produced
Estimated Productive Life
3)        Accelerated Depreciation

    recognition of relatively large amounts of depreciation in
early years and less in later years
    assets more efficient and provide better services earlier
    therefore should allocate greater portion of asset’s cost to
match this greater output
    popular for tax purposes – reduces tax burden in current
year

    there are two varying techniques of accelerated
depreciation:

a)   Double-Declining Balance

•    double straight-line depreciation rate
•    this constant rate is applied to the Net Book Value
(NBV) of the asset to determine the amount of
depreciation for the period (NBV = Cost - Accumulated
Depreciation)
•    continue depreciating until the NBV = Salvage Value
•    Annual Expense = NBV * constant rate

b)   Sum-of-Years’ Digits (SYD)

    depreciation rate to be used is a fraction
    the numerator is remaining years of useful life
    the denominator = sum of years of useful life
•    Annual Expense:
(Cost -            *      useful life at beginning of period
Salvage Value)             sum of the years of useful life
Partial Year Depreciation

•    in the year of acquisition, the amount of depreciation must be
apportioned according to the length of time the asset has actually been
owned

•    if the purchase was made during the first half of the month, include
that month in your depreciation calculation

•    if the purchase was made during the last half of the month, do not
include that month in your depreciation calculation

•    partial depreciation must also be calculated when asset disposal
occurs

•    the half-year rule requires that in the year of acquisition, only a ½
year of depreciation may be taken, regardless of the purchase date

Depreciation’s Impact on Financial Statements

•    the choice of depreciation method will have an impact on the income
statement

•    using an accelerated method of depreciation (SYD, declining balance)
results in a lower net income figure initially and then a higher net
income figure near the end of its useful life

•    GAAP requires the consistent application of one depreciation method
(consistency principle)

•    but, the same method is not required for different types of plant assets

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