Depreciation of plant is divided equally between the
different departments.
Answers
Answer:
There are several types of depreciation expense and different formulas for determining the book value of an asset. The most common depreciation methods include:
. Straight-line
. Double declining balance
.Units of production
. Sum of years digits
Depreciation expense is used in accounting to allocate the cost of a tangible asset over its useful life. In other words, it is the reduction in the value of an asset that occurs over time due to usage, wear and tear, or obsolescence. The four main depreciation methods mentioned above are explained in detail below.
Types of Depreciation Methods
#1 Straight-Line Depreciation Method
Straight-line depreciation is a very common, and the simplest, method of calculating depreciation expense. In straight-line depreciation, the expense amount is the same every year over the useful life of the asset.
Depreciation Formula for the Straight Line Method:
Depreciation Expense = (Cost – Salvage value) / Useful life
Example
Consider a piece of equipment that costs $25,000 with an estimated useful life of 8 years and a $0 salvage value. The depreciation expense per year for this equipment would be as follows:
Straight Line Depreciation Formula
Depreciation Expense = ($25,000 – $0) / 8 = $3,125 per year
Straight Line Depreciation Chart
Depreciation expense is used in accounting to allocate the cost of a tangible asset over its useful life. In other words, it is the reduction in the value of an asset that occurs over time due to usage, wear and tear, or obsolescence. The four main depreciation methods mentioned above are explained in detail below.
Types of Depreciation Methods
#1 Straight-Line Depreciation Method
Straight-line depreciation is a very common, and the simplest, method of calculating depreciation expense. In straight-line depreciation, the expense amount is the same every year over the useful life of the asset.
Depreciation Formula for the Straight Line Method:
Depreciation Expense = (Cost – Salvage value) / Useful life
Example
Consider a piece of equipment that costs $25,000 with an estimated useful life of 8 years and a $0 salvage value. The depreciation expense per year for this equipment would be as follows:
Straight Line Depreciation Formula
Depreciation Expense = ($25,000 – $0) / 8 = $3,125 per year
Straight Line Depreciation Chart
units) x (Cost – Salvage value)
Example
Consider a machine that costs $25,000, with an estimated total unit production of 100 million and a $0 salvage value. During the first quarter of activity, the machine produced 4 million units.
Units of Production Depreciation Method Example
To calculate the depreciation expense using the formula above:
Depreciation Expense = (4 million / 100 million) x ($25,000 – $0) = $1,000
Units of Production Depreciation Method Chart
4 Sum-of-the-Years-Digits Depreciation Method
The sum-of-the-years-digits method is one of the accelerated depreciation methods. A higher expense is incurred in the early years and a lower expense in the latter years of the asset’s useful life.
In the sum-of-the-years digits depreciation method, the remaining life of an asset is divided by the sum of the years and then multiplied by the depreciating base to determine the depreciation expense.
The depreciation formula for the sum-of-the-years-digits method:
Depreciation Expense = (Remaining life / Sum of the years digits) x (Cost – Salvage value)
Consider the following example to more easily understand the concept of the sum-of-the-years-digits depreciation method.
Example
Consider a piece of equipment that costs $25,000 and has an estimated useful life of 8 years and a $0 salvage value. To calculate the sum-of-the-years-digits depreciation, set up a schedule:
Sum-of-the-Years Digits Depreciation Method Example
The information in the schedule is explained below:
The depreciation base is constant throughout the years and is calculated as follows:
Depreciation Base = Cost – Salvage value
Depreciation Base = $25,000 – $0 = $25,000
2. The remaining life is simply the remaining life of the asset. For example, at the beginning of the year, the asset has a remaining life of 8 years. The following year, the asset has a remaining life of 7 years, etc.
3. RL / SYD is “remaining life divided by sum of the years.” In this example, the asset has a useful life of 8 years. Therefore, the sum of the years would be 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 = 36 years. The remaining life in the beginning of year 1 is 8. Therefore, the RM / SYD = 8 / 36 = 0.2222.
4. The RL / SYD number is multiplied by the depreciating base to determine the expense for that year.
5. The same is done for the following years. In the beginning of year 2, RL / SYD would be 7 / 36 = 0.1944. 0.1944 x $25,000 = $4,861 expense for year 2.
Sum-of-the-Years Digits Depreciation Method Chart
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Summary of Depreciation Methods
Below is the summary of all four depreciation methods from the examples above.