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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Characteristics of Depreciation Methods

Below is a common list of depreciation methods and characteristics related to depreciation.

Depreciation Methods

a. Straight-line depreciation method

b. Declining balance depreciation method

c. Units-of-production depreciation method when actual units produced increases over the life of the asset

Characteristics

1. Results in depreciation expense that decreases over the life of the asset.

2. Results in depreciation expense that increases over the life of the asset.

3. Allocates the same amount of cost to each period of a depreciable asset’s life.

4. Calculated by multiplying a constant depreciation rate by depreciable cost.

5. Calculated by applying a constant depreciation rate to the asset’s book value at the beginning of the period.

6. Results in lowest income taxes in early years of the asset’s life.

7. Consistent with the matching principle.

Required:

Match one or more of the depreciation methods with each characteristic.

To determine

Concept introduction:

Straight-line Depreciation:

Depreciation is done by allocating the cost of the fixed assets other than land to expense over the useful life of the asset. The most commonly used method of depreciation is straight line method. In this method every year until the useful life of the asset, equal amount of assets cost to depreciation expense is allocated. The formula to calculate straight line depreciation is:

Straight line depreciation = (cost − residual value) / expected useful life

Double declining balance method:

In this method depreciation the book value of an asset declines every year by the constant depreciation rate and hence the depreciation amounts are larger in the initial periods of asset’s life but becomes relatively smaller in the later years. This method is applied for those assets which become obsolete due to technological changes.

Units of production method:

In this method the depreciation expense is determined on the basis of the usage of asset. Once the company estimates the usage rate of the asset then the depreciation expense is calculated based on the usage rate.

Match the depreciation methods with each of the given characteristics.

Explanation
  1. Under double declining balance method the depreciation expenses in the initial periods are higher but in the latter stages of the machine the depreciation expense become less.
  2. Under units of production method when actual units produced increases over the life of the asset the depreciation expense increases when the usage of asset increases over a period of time since this method is based on the actual usage of the asset.
  3. Under straight line depreciation method a constant depreciation expenses is allocated every year until the useful life of the asset.
  4. Under straight line depreciation method a constant depreciation rate to the depreciation cost is applied...

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