Discussion Forum Unit 6

Liam is struggling to determine which deprecation method he should use for his new silk-
screening machine. He expects sales to increase over the next five years. He also expects (hopes)
that in two years he will need to buy a second silk-screening machine to keep up with the
demand for products of his growing company. Discuss which depreciation method makes more
sense for Liam:

 Higher expenses in the first few years, or keeping expenses consistent over time?
 Or would it be better for him to not think in terms of time, but rather in the usage of the
machine?
 Please explain your choice.

Discussion Forum Unit 6

Depreciation is used as a tax deduction. This is not to say that it should be used excessively, as
this can have an impact on how investors and lenders perceive the company. With these factors
in mind, the depreciation method can be determined by considering time and usage. Straight-line
depreciation takes into account time but ignores usage. Units-of-production depreciation takes
into account usage and ignores time.
The double-declining-balance depreciation method takes both time and usage into account. This
is a more complicated method that takes double the straight-line depreciation in the first year and
continues to apply that percentage value as depreciation each year.
Liam has the option of discounting time and relying on unit-of-production depreciation. With
this consideration, he could purchase his second silk-screening machine without experiencing
any financial negative equity effects when a lender reviews his books. In addition, he will have a
larger tax deduction for depreciation in the second year. The main disadvantage of this method is
that once the first machine has printed the maximum number of prints, Liam will be unable to
record any further depreciation.
Straight-line depreciation treats time as the premium value, resulting in a consistent stream of
reductions for a company over the product's useful life. This aids in the stabilization of a
company's financial reports. The double-declining-balance depreciation method provides the
same benefit, but accounts for a greater loss of value during the initial period of ownership,
which can have both positive and negative consequences for the business.
When we evaluate all three options, we can see that units-of-production depreciation provides
the most benefits because Liam will be depreciating a second machine alongside the first,
providing a greater tax advantage. With an increased tax deduction of $2,700 on the first
machine for the second year of operation compared to $1,800 when using units-of-production
depreciation versus $1,800 when using straight-line depreciation constant deduction (Franklin,
2020). If Liam used straight-line depreciation, his company's financial performance would suffer
in his financial statements. The double-declining-balance depreciation method would also have a
significant impact on his financial situation, as the asset value plummeted in the first year of
ownership, affecting his ability to obtain a loan if one was required.
Finally, Liam could always sell the first machine and buy a third when it reaches the end of its
depreciation life, allowing him to stay up to date on the most relevant ink saving printers while
still receiving the depreciation. Selling the first machine generates profits if it is sold for more
than its end-of-life or salvage value, resulting in higher earnings (Franklin, 2020).
References
Franklin, M. Graybeal, P. & Cooper, D. (2020). Principles of accounting, volume 1:
Financial accounting. Open Stax Rice University.
https://openstax.org/details/books/principles-financial-accounting