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Plant Assets
Chapter Summary
Depreciation:
Depreciation is the process of allocating to expense the cost of a
plant asset over its useful life in a rational and systematic
manner.
1
Depreciation Methods:
Depreciation expense is generally computed using one of the
following methods:
1. Straight-line.
2. Declining-balance.
3. Units-of-activity.
Example:
On January 1, 2010, Mark Company purchased a small
delivery truck. The following information relates to that truck:
Cost $13,000
Expected salvage value 1,000
Estimated useful life in years 5
Estimated useful life in miles 100,000
Straight-line Method:
Under the straight-line method:
1. Depreciation expense is the same for each year of the asset’s
useful life.
2
Declining-Balance Method:
The declining-balance method produces a decreasing annual
depreciation expense over the useful life of the asset.
The book value for the first year is the cost of the asset since
accumulated depreciation has a zero balance at the beginning
of the first year of the asset’s useful life.
3
(1) (2) (3) (4)
Year Cost Annual Depreciation Expense Accumulated Book
= Book Value Beginning of Depreciation
Year × Depreciation Rate Old (3) + (2)
Value
(1) – (3)
First $13,000 $13,000 × 40% = $5,200 $5,200 $7,800
Second $13,000 $7,800 × 40% = $3,120 8,320 4,680
Third $13,000 $4,680 × 40% = $1,872 10,192 2,808
Fourth $13,000 2,808 × 40% = $1,123 11,315 1,685
Fifth $13,000 $1,685 - $1,000 salvage = $685 12,000 1,000
Units-of-Activity Method:
Under the units-of-activity method, the useful life of the asset is
expressed in terms of the total units of production or expected
use from the asset, rather than as a time period.