Chapter 9 – Fixed Assets and Intangible Assets

 

Three Common Depreciation Methods

(All three result in the same amount of depreciation over the life of the asset)

The only difference is in the timing of the depreciation

 

Straight Line Depn                 Units of Production      Declining Balance

 

Same amount of dep’n              The amount of depreciation                   An accelerated method

Expense each year                    varies each year, unlike

                                                Straight line.                                          Results in more depn

If you were to chart it,                                                                           in earlier years and less

you would see a straight            The depreciation expense                      in later years.

line across the life of the            is based on USAGE of

asset. (This means that              the asset.                                              Based on a tax method

the depreciation is a fixed

cost and not determined            The life of the asset is                            Calculate the SL rate

by any usage of the asset.          expressed in terms of

                                                output.                                                  Double it

Formula:                                   Formula:

Cost – Residual Value            Cost – Residual Value                           Apply the rate to the

     Life (in years)                      Life (in hours or units or                        cost of the new asset

                                                                      other output basis)          (without considering

                                                                                                            the residual value.)

 

Cost is same each year (unless                                                              Each year, calculate     

the asset is purchased mid-year                                                             the asset’s book value

and then an adjustment is made.                                                            and apply the rate.

 

Widely Used and Simple                                                                       The last year should

                                                Take the rate calculated                        be “plugged” to

Reasonable way to allocate         above and multiply by                         avoid over-depreciating

the cost of an asset over its         the output of the machine                     the asset.

life.                                           each year         

                                                                                                            Residual value is not

 Maximum depn is equivalent                Maximum depn is equiv.           considered except that

to “depreciable cost” which                   to “depreciable cost” which       you don’t depreciate

is the cost of the asset less                     is the cost of the asset less         below the “depreciable”

its residual value                                    its residual value  .                     cost which is the cost of                                                                                                            the asset less its Res Val