Chapter 10, Problem 8DQ

To determine

Methods of Depreciation:

Depreciation refers to the reduction in the monetary value of a fixed asset due to its wear and tear, or obsolescence. It is a method of distributing the cost of the fixed assets over its estimated useful life.

The three methods of depreciation are:

• Straight-line method: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset.

• Units-of-activity method: In this method of depreciation, the amount of depreciation is charged based on the units of production each year.

• Double-declining balance method (Accelerated method): In this method of depreciation, the diminishing value of the asset is taken into consideration for determining the depreciation for the succeeding years.

To explain: (a) the conditions under which the accelerated depreciation method is the most appropriate to use, (b) the conditions why is an accelerated depreciation method often used for income tax purposes, and (c) the Modified Accelerated Cost Recovery System (MACRS), and under what conditions is it used.