Depreciation Methods

GAAP

Depreciation is a systematic and rational process of distributing the cost of tangible assets over the life of assets.      Depreciation is a process of allocation.      Cost to be allocated = acquisition cot - salvage value      Allocated over the estimated useful life of assets.      Allocation method should be systematic and rational.

Depreciation Methods

Depreciation methods based on time            Straight line method            Declining balance method                     Sum-of-the-years'-digits method      Depreciation based on use (activity)

Straight Line Depreciation Method

Depreciation = (Cost - Residual value) / Useful life [Example, Straight line depreciation]         On April 1, 2011, Company A purchased an equipment at the cost of $140,000.  This equipment is estimated to have 5 year useful life.  At the end of the 5th year, the salvage value (residual value) will be $20,000.  Company A recognizes depreciation to the nearest whole month.  Calculate the depreciation expenses for 2011,  2012 and 2013 using straight line depreciation method.         Depreciation for 2011            = ($140,000 - $20,000) x 1/5 x 9/12 = $18,000        Depreciation for 2012            = ($140,000 - $20,000) x 1/5 x 12/12 = $24,000        Depreciation for 2013            = ($140,000 - $20,000) x 1/5 x 12/12 = $24,000

Declining Balance Depreciation Method

Depreciation = Book value x Depreciation rate        Book value = Cost - Accumulated depreciation               Depreciation rate for double declining balance method            = Straight line depreciation rate x 200%        Depreciation rate for 150% declining balance method            = Straight line depreciation rate x 150% [Example, Double declining balance depreciation]         On April 1, 2011, Company A purchased an equipment at the cost of $140,000.  This equipment is estimated to have 5 year useful life.  At the end of the 5th year, the salvage value (residual value) will be $20,000.  Company A recognizes depreciation to the nearest whole month.  Calculate the depreciation expenses for 2011,  2012 and 2013 using double declining balance depreciation method.         Useful life = 5 years  -->  Straight line depreciation rate = 1/5 = 20% per year        Depreciation rate for double declining balance method             = 20% x 200% = 20% x 2 = 40% per year        Depreciation for 2011            = $140,000 x 40% x 9/12 = $42,000        Depreciation for 2012            = ($140,000 - $42,000) x 40% x 12/12 = $39,200        Depreciation for 2013            = ($140,000 - $42,000 - $39,200) x 40% x 12/12 = $23,520      Double Declining Balance Depreciation Method   Year Book Value at the beginning Depreciation Rate Depreciation Expense Book Value at the year-end 2011 $140,000 40% $42,000 (*1) $98,000 2012 $98,000 40% $39,200 (*2) $58,800 2013 $58,800 40% $23,520 (*3) $35,280 2014 $35,280 40% $14,112 (*4) $21,168 2015 $21,168 40% $1,168 (*5) $20,000    (*1) $140,000 x 40% x 9/12 = $42,000    (*2) $98,000 x 40% x 12/12 = $39,200    (*3) $58,800 x 40% x 12/12 = $23,520    (*4) $35,280 x 40% x 12/12 = $14,112    (*5) $21,168 x 40% x 12/12 = $8,467            --> Depreciation for 2015 is $1,168 to keep book value same as salvage value.            --> $21,168 - $20,000 = $1,168 (At this point, depreciation stops.)

[Example, 150% declining balance depreciation]          On April 1, 2011, Company A purchased an equipment at the cost of $140,000.  This equipment is estimated to have 5 year useful life.  At the end of the 5th year, the salvage value (residual value) will be $20,000.  Company A recognizes depreciation to the nearest whole month.  Calculate the depreciation expenses for 2011,  2012 and 2013 using double declining balance depreciation method.         Useful life = 5 years  -->  Straight line depreciation rate = 1/5 = 20% per year        Depreciation rate for double declining balance method             = 20% x 150% = 20% x 1.5 = 30% per year        Depreciation for 2011            = $140,000 x 30% x 9/12 = $31,500        Depreciation for 2012            = ($140,000 - $31,500) x 30% x 12/12 = $32,550        Depreciation for 2013            = ($140,000 - $31,500 - $32,550) x 30% x 12/12 = $22,785    150% Declining Balance Depreciation Method   Year Book Value at the beginning Depreciation Rate Depreciation Expense Book Value at the year-end 2011 $140,000 30% $31,500 (*1) $108,500 2012 $108,500 30% $32,550 (*2) $75,950 2013 $75.950 30% $22,785 (*3) $53,165 2014 $53,165 30% $15,950 (*4) $37,216 2015 $37,216 30% $11,165 (*5) $26,051 2016 $26,051 30% $6,051 (*6) $20,000    (*1) $140,000 x 30% x 9/12 = $31,500    (*2) $108,500 x 30% x 12/12 = $32,550    (*3) $75,950 x 30% x 12/12 = $22,785    (*4) $53,165 x 30% x 12/12 = $15,950    (*5) $37,216 x 30% x 12/12 = $11,165    (*6) $26,051 x 30% x 12/12 = $7,815            --> Depreciation for 2016 is $6,051 to keep book value same as salvage value.            --> $26,051 - $20,000 = $6,051 (At this point, depreciation stops.)