Liam is struggling to determine which deprecation method he should use for his new silk-screening machine. He expects sales to increase over the next five years. He also expects (hopes) that in two years he will need to buy a second silk-screening machine to keep up with the demand for products of his growing company. Discuss which depreciation method makes more sense for Liam:
Higher expenses in the first few years, or keeping expenses consistent over time?
Or would it be better for him to not think in terms of time, but rather in the usage of the machine?
Please explain your choice.
Answers
Explanation:
Liam is struggling to determine which deprecation method he should use for his new silk-screening machine. He expects sales to increase over the next five years. He also expects (hopes) that in two years he will need to buy a second silk-screening machine to keep up with the demand for products of his growing company. Discuss which depreciation method makes more sense for Liam:
Higher expenses in the first few years, or keeping expenses consistent over time?
Or would it be better for him to not think in terms of time, but rather in the usage of the machine?
Please explain your choice.
Answer:
The depreciation method that will makes more sense for Liam is, the double-declining-balance depreciation method, this method is the most complex one, of the three methods because it accounts for both time and usage and takes more expense in the first few years of the asset’s life. Double-declining considers time by determining the percentage of depreciation expense that would exist under straight-line depreciation.
Explanation:
For example, a five-year asset would be 100/5, or 20% a year. A four-year asset would be 100/4, or 25% a year. Next, because assets are typically more efficient and “used” more heavily early in their life span, the double-declining method takes usage into account by doubling the straight-line percentage. For a four-year asset, multiply 25% (100%/4-year life) × 2, or 50%. For a five-year asset, multiply 20% (100%/5-year life) × 2, or 40%.