Accounting Q26-30
Essay by Émi Enkhbaatar • April 9, 2018 • Exam • 3,575 Words (15 Pages) • 1,003 Views
Exhibit 15.
Straight Line Method
Depreciation expense in a year:
(Acquisition cost – Salvage value) ÷ Useful life in years
Example: Acquisition cost $2,200
Useful life 4 years
Salvage value $200
Depreciation percentage:
100 ÷ № of useful life in years
100 ÷ 4 years = 25%
Depreciation expense:
($2,200 - $200) ÷ 4 years = $500 per year
Advantages of the method:
- Easy to calculate
- Applicable to the majority of non-current assets
- Easy to use in planning
Disadvantages of the method:
- Every year the depreciation expense is the same in the
Income statement, although the contribution to the business is lower as the asset is older
- As time goes by, the repair and maintenance costs are higher and higher which causes a higher total expense for this asset in late years
8/8
Decreasing Charge Methods
- Declining balance method
This method applies a depreciation rate to the book value of the asset at the beginning of each year. As the book value decreases, so does the depreciation charge.
The rate is calculated by a mathematical formula, but for the sake of simplicity, we will use a predetermined rate given for each case. Following the previous example, the rate according to the calculation is 45% (rounded).
Then:
Acquisition cost $2,200
Depreciation in Year 1 is: $2,200 × 45% 990
Balance at the start of Year 2: $1,210
Depreciation in Year 2: $1,210 × 45% 545 (rounded)
Balance at the start of Year 3: $ 665
Depreciation in Year 3: $665 × 45% 299 (rounded)
Balance at the start of Year 4: $ 366
Depreciation in Year 4: 166*
Balance at the end of the lifetime $ 200
*The ending amount must be equal to the salvage value, therefore no need to calculate in the last year the exact amount, which will be different from the required sum thanks to rounding error.
Two short-cut ways to calculate the required rate:
- Double declining balance (DDB)
The straight line % is multiplied by 2. This is: SL 25% × 2 = 50%
- X % declining balance
E.g. 180% estimation × SL 25% = 45%
8/9
2 Sum-of-the-years’ digit method
Sum of the years: 1 + 2 + 3 + 4 = 10
Year Depreciation expense
1 4/10 × 2,000 = 800
2 3/10 × 2,000 = 600
3 2/10 × 2,000 = 400
4 1/10 × 2,000 = 200
2,000
Advantages of the two decreasing charge methods:
* Both the declining balance and the sum-of-the-years
digit method reflect the intensive use of the asset in early years.
* The calculation is easier in case of sum-of-the-year digit
method than the exact calculation of the declining balance percentage.
Disadvantage of the two methods:
* Their use is limited to specific kind of assets.
8/10
Units of Service Method
Using the original data, additional information is the following:
Year 1 3,000 units of output
2 2,500 “
3 1,500 “
4 1,000 “
Total 8,000 units of output
Solution:
Cost of one unit:
($2,200 - $200) ÷ 8,000 units = $0.25
Depreciation expense:
Year 1 3,000 units × $0.25 = $ 750
2 2,500 “ × $0.25 = 625
3 1,500 “ × $0.25 = 375
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