Straight-line Method of Depreciation
In straight line depreciation method, depreciation is charged uniformly over the life of an asset. We first subtract residual value of the asset from its cost to obtain the depreciable amount. The depreciable amount is then divided by the useful life of the asset in number of accounting periods to obtain depreciation expense per accounting period. Due to the simplicity of the straight line method of depreciation, it is the most commonly used depreciation method.
Example 1: On Jan 1, 2011 Company A purchased a vehicle costing $20,000. It is expected to have a value of $5,000 at the end of 4 years. Calculate depreciation expense on the ...view middle of the document...
Example 1: An asset costing $20,000 has estimated useful life of 5 years and salvage value of $4,500. Calculate the depreciation for the first year of its life using double declining balance method.
Straight-line Depreciation Rate = 1 ÷ 5 = 0.2 = 20%
Declining Balance Rate = 2 × 20% = 40%
Depreciation = 40% × $20,000 = $8,000
Double Declining Balance Depreciation Method
Double declining balance depreciation method is a type of declining balance depreciation method in which depreciation rate is double the straight-line depreciation rate. For straight-line depreciation rate of 8%, double declining balance rate will be 2 × 8% = 16%.
The salvage value of the copy machine is $200.00. The depreciation would be calculated as follows:
1 4,217.75 4,217.75 * 0.4 1,687.10 1,687.10
2 2,530.65 2,530.65 * 0.4 1,012.26 2,699.36
3 1,518.39 1,518.39 * 0.4 607.36 3,306.72
4 911.03 911.03 * 0.4 364.41 3,671.13
5 546.62 546.62 * 0.4 218.65 3,889.78
This calculation is exactly the same as the initial example. At the end of the useful life the book value of the copy machine is $327.97. The book value is larger than the salvage value so there is no change to the calculation.
Sum of the Years' Digits Method of Depreciation
Sum of the years' digits method of depreciation is one of the accelerated...