Depreciation Methods

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Hartnell College
Depreciation Methods
Presentation by Robert J. Maffei
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Depreciation
The cost is spread out over its estimated useful
life in the form of an expense given various
depreciation methods.
Depreciation is an expense based on the
expectation that an asset will gradually decline
in usefulness due to time, wear and tear, or
obsolescence.
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Depreciation Methods

• Straight-line depreciation allocates an equal
  amount of the cost of a plant asset to expense
  during each fiscal period of the assets expected
  useful life.
• Accelerated depreciation allocates a larger
  portion of the cost of a plant asset to expense
  early in the assets life. Double-Declining-Balan
  ce is an example of an accelerated method.

Continued
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Depreciation Methods

• Units-of-production depreciation allocates an
  assets cost to depreciation expense based on
  unit of output or activity (rather than per
  fiscal period).

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Depreciation
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Depreciation Methods Used by Major U.S.
Corporations for Financial Reporting
Data Source AICPA, Accounting Trends and
Techniques, 2001
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Straight-Line Calculation
Moms Cookie Company purchased equipment on
January 1, 2004, at a cost of 50,000.
Management expects the equipment to have a
four-year life and a 2,000 residual value.
Cost Residual Value Expected Life
50,000 2,000
4 years
Straight-Line Depreciation
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Depreciation
Accumulated Depreciation is a contra-asset
account that offsets Equipment.
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Book Value
The book value of a plant asset is the net cost
of the asset after accumulated depreciation (the
contra account) has been subtracted.

• 50,000 Beg. Book Value
• -12,000 Accum. Depre.
• 38,000 End. Book Value

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Straight-Line Depreciation Schedule
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Accelerated Depreciation
If Moms Cookie Company used double-declining-bala
nce method, it would Multiply the straight-line
rate by two, e.g. 2/1 x ¼ 2/4
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Double-Declining Balance Depreciation Schedule
Accelerated Depreciation
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Reasons for Using Accelerated Depreciation
1. An asset is more useful earlier in its life
than later, and the useful life may be difficult
to estimate. 2. Depreciation expense is
deductible in computing taxable income and income
taxes.
The second reason is the most common reason for
using accelerated depreciation.
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Comparison of Straight-Line and Accelerated
Depreciation Methods in 2004
Accelerated
Straight-Line
Income before depreciation and
taxes 100,000 100,000 Depreciation expense
12,000 25,000 Pretax income 88,000 75,000 Inco
me taxes (35) 30,800 26,250 Net income
57,200 48,750
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Activity Depreciation
At the beginning of 2005, Moms Cookie Company
purchased a truck for 30,000. Management
expects the useful life of the truck to be
100,000 miles, at which time it will be sold for
10,000.
Cost Residual Value Expected Units
30,000 10,000
100,000 miles
Units-of-Production Depreciation
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Activity Depreciation
If the truck were driven 12,000 miles in 2005,
Hydro would record depreciation expense of 2,400
(12,000 x 0.20).
Units-of-Production Depreciation