11170-11-1E AID: 8739 | 01/11/2020

Depreciation

It is the amount of reduction in the value of a tangible fixed asset due to tear and wear,
maintenance and passage of time. This expense reduces the carrying value of asset on the
financial statements and provides the true value of asset. It is charged as an expense on
the income statement. Different methods of calculating depreciation expense include
straight-line method, double declining method, sum of year’s digits method etc.

(1)

Straight-line method:

Under the straight-line method, the asset is recognized as an expense as a yearly fixed
amount based on useful life and acquisition cost of the asset. This method uses
depreciable value or base value of the asset to calculate depreciation expense. The
following is the formula to calculate the yearly depreciation:

Calculate the depreciation expense.

Calculate the depreciation expense under straight-line method as shown below:

Thus, the depreciation expense as per straight line method is $6,000 per year.

(2)

Sum-of- the-years’ digits method:

It is the depreciation method in which the depreciation expense is calculated on the basis
of number of years the asset is used over the useful life of the asset. The declining
fraction and the depreciable base are used to determine the depreciation expense under
this method.

Calculate the depreciation expense using sum-of-years’ digits method:

Step 1: Calculate sum-of-the-digits using the formula . Therefore, the sum-of-

the-digits is calculated as follows:

Step 2: Calculate the depreciable base.

The depreciable base is calculated by deducting the residual value from the cost of the
asset as shown below:

Step 3: Calculate the depreciation expense using sum-of-years’ digits method.

The depreciation expense is calculated by multiplying the depreciable base with the
depreciation rate per year (total number of years still the asset is usable divided by the
sum of total years) as shown below:

Depreciable Depreciation Depreciation

Year
Base ($) rate per year ($)
2013 30,000 × 5÷15 × 10,000
2014 30,000 × 4÷15 × 8,000
2015 30,000 × 3÷15 × 6,000
2016 30,000 × 2÷15 × 4,000
2017 30,000 × 1÷15 × 2,000
Total 30,000

Hence, the total depreciation expense under sum-of-years’ digits method is $30,000.
(3)

Double-declining method:

The method assumes that the asset would decrease its value more in the early years and
less in the later years and hence the cost of the asset is divided based on the straight-line
rate and declining amount method.

Step1: Calculate the depreciation rate applied each year.

Useful life = 5 years

Note: Use 100% to represent depreciation in percentage. Multiply the depreciation rate
by 2 as it is a double-declining method.

Step 2: Calculate the depreciation expense using double-declining balance method.

Book value Book value

Depreciation Depreciation
Year beginning of end of the
rate per year ($)
year ($) year ($)
2013 33,000 × 40% = 13,200 19,800
2014 19,800 × 40% = 7,920 11,800
2015 11,880 × 40% = 4,752 7,128
2016 7,128 × 40% = 2,851 4,277
2017 4,277 × 40% = 1,277 3,000
Total 30,000

Hence, the depreciation expense using double-declining balance method is $30,000.

Note:

The following calculation is done to determine the amount that is necessary to reduce the
book value to residual value.

(4)

Units of production method:

The units of production method, is also called as units of activity method. Under this
depreciation calculated based on the proportion of the assets usage for production. More
depreciation will be charged to income statement, when there is more usage. As well as
less depreciation charged when assets are used less.

It is the most accurate method for charging depreciation, since in this method
depreciation charged based on the assets usage Le based on the units produced. This
method is most useful to calculate depreciation for the assets which are used in the
manufacturing process.

Step 1: Determine the depreciation per unit.

Step 2: Calculate the depreciation expense using unit-of-production method.

Book value Book value

Actual miles Depreciation Depreciation
Year end of the end of the
driven rate per year ($)
year ($) year ($)
2013 33,000 22,000 × 30% = 6,600 26,400
2014 26,400 24,000 × 30% = 7,200 19,200
2015 19,200 15,000 × 30% = 4,500 14,700
2016 14,700 20,000 × 30% = 6,000 8,700
2017 8,700 21,000 × 30% = 5,700 3,000
Total 102,000 30,000

Hence, the depreciation expense using unit-of-production method is $30,000.

Note: The following calculation is done to determine the amount that is necessary to
reduce the book value to residual value.