Q1CA - Horngren'S Financial And Managerial Accounting

Question

Question: In 150 words or fewer, explain the different methods that can be used to calculate depreciation. Your explanation should include how to calculate depreciation expense using each method.

Step-by-Step Solution

Answer

Answer

There are three main depreciation methods – Straight line, Units of production, and Double declining method.

 

Step 1: Meaning of Depreciation

Depreciation is the asset's cost spread over the useful life for providing benefits and charged in the income statement.

Step 2: Methods of depreciation

There are generally three main methods of providing depreciation –

1) Straight Line method - Under this method, depreciation is charged by spreading the assets' cost equally through the estimated life of the assets. Depreciation is computed by –

 $\mathit{D}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{=}\frac{\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{R}\mathbf{e}\mathbf{s}\mathbf{i}\mathbf{d}\mathbf{u}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{U}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{L}\mathbf{i}\mathbf{f}\mathbf{e}}$ 

 

2) Units-of-production method – Under this method, depreciation is charged based on the assets’ usage or production volume. Depreciation is computed by –

 $\mathit{D}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{=}\frac{\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{R}\mathbf{e}\mathbf{s}\mathbf{i}\mathbf{d}\mathbf{u}\mathbf{a}\mathbf{l}\mathbf{v}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}}{\mathbf{U}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{L}\mathbf{i}\mathbf{f}\mathbf{e}\mathbf{i}\mathbf{n}\mathbf{u}\mathbf{n}\mathbf{i}\mathbf{t}\mathbf{s}}\mathbf{\times }\mathit{N}\mathit{o}\mathbf{.}\mathit{o}\mathit{f}\mathit{u}\mathit{n}\mathit{i}\mathit{t}\mathit{s}\mathit{u}\mathit{s}\mathit{e}\mathit{d}$

 

3) Double declining balance method – This method is the same as the straight-line method, with the only difference being that the rate is doubled compared to the straight-line method. Depreciation is computed by –

 $\mathit{D}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{=}\frac{\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{-}\mathbf{A}\mathbf{c}\mathbf{c}\mathbf{u}\mathbf{m}\mathbf{u}\mathbf{l}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{d}\mathbf{d}\mathbf{e}\mathbf{p}\mathbf{r}\mathbf{e}\mathbf{c}\mathbf{i}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{n}}{\mathbf{U}\mathbf{s}\mathbf{e}\mathbf{f}\mathbf{u}\mathbf{l}\mathbf{L}\mathbf{i}\mathbf{f}\mathbf{e}}\mathbf{\times }\mathbf{2}$