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 unit 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: the complications that might arise while comparing the results from two different depreciation methods followed by two companies.

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Chapter 9, Problem 24Q

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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 unit 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: the complications that might arise while comparing the results from two different depreciation methods followed by two companies.

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Sheldon Crop wishes to use different depreciation methods for the major classes of property, plant, and equipment. What should the company do? a.The company should choose the most generally advantageous method and use that one for all classes of property, plant and equipment. b.The company should not separate plant, property and equipment into classes and therefore they should use the same depreciation method for all assets. c.The company should add notes to explain which methods are used for which classes and clearly disclose the amounts in the financial statements. d.The company should make separate financial statements for each class of property, plant and equipment in order to use different methods of depreciation.

As explained in this chapter, accounting theory allows firms to choose a depreciation method from several equally acceptable alternatives to allocate the cost of a long-term asset to expense over the useful life of the asset. In practice, however, most organizations use the straight-line method of depreciation for financial statement presentation and the Modified Accelerated Cost Recovery System (MACRS) for tax reporting purposes because the Internal Revenue Code allows firms to use an accelerated depreciation method on their tax returns, instead of the straight-line method they report under GAAP. Discuss why a company would choose to use straight-line deprecation for financial reporting purposes and an accelerated method for tax purposes. Speculate on why the tax code might allow firms to accelerate depreciation for investments in productive resources.

What is the difference between depreciation expense and accumulated depreciation? What two items surprised you that a company is allowed to capitalize? What do you know as reasons a company may choose one deprecation method over another?