Depreciation Methods and Profit Impact

This accounting assignment analyzes the change in depreciation method from straight-line to sum-of-years digits. It explains the rationale behind this change, highlighting how it impacts profit calculations in different years. The analysis includes a comparison of both methods and demonstrates the effect of accelerated depreciation on financial reporting.

Running head: ACCOUNTING AND FINANCIAL MANAGEMENT
Accounting and Financial Management
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
Answer to Question C:.....................................................................................................................2
References:......................................................................................................................................5

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Answer to Question C:
It could be observed that the method of depreciation has been changed from straight-line
to sum-of-years digits. In this context, Ji (2017) stated that the straight-line depreciation is the
default method utilised for gradual reduction of the carrying amount of a non-current asset over
its useful life. The method is formulated for depicting the consumption pattern of the underlying
asset over its economic life. This method is adopted widely in most of the organisation because
of its simplicity in calculation and minimised number of errors (Kotas 2014). On the other hand,
the sum-of-years digits method is an accelerated technique of depreciation, which is based on the
assumption that assets are productive at the time they are new and there is decrease in
productivity, as they become old (Yussof, Isa and Mohdali 2014).
According to the provided information in the case study, it could be identified that
Marion Mason has decided the depreciation method from the method of straight-line to the sum-
of-years-digits. The primary goal of using the sum-of-years-digits method would be to reduce the
overall margin of profit in the next two years. This is because the profit would be shifted to 2018
and 2019 for fighting with the expected slowdown in the economy. This could be represented
with the help of the following instance:
Asset cost = $500,000
Useful life of the asset = 5 years
Salvage value = $50,000
Based on the above figures, the contrast between profits by using the straight-line
depreciation method and sum-of-years-digits method is represented briefly as follows:

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Method of straight-line depreciation:
Straight-line depreciation = (Cost of asset – Salvage value of the asset)/ Useful life of the asset
Straight-line depreciation = ($500,000 - $50,000)/5 = $90,000
Method of sum-of-years-digits:
Sum-of-years-digits method = Depreciable base x (Remaining useful life of the asset/ Sum-of-
years-digits)
Sum-of-years-digits = n (n + 1)/2
Sum-of-years-digits = 5 (5 + 1)/2
Sum-of-years-digits (SYD) = 15
Years Depreciable base Left over useful life SYD Applicable percent Yearly depreciation
1 $450,000 5 5/15 33.33% $150,000
2 $450,000 4 4/15 26.67% $120,000
3 $450,000 3 3/15 20.00% $90,000
4 $450,000 2 2/15 13.33% $60,000
5 $450,000 1 1/15 6.67% $30,000
Statement showing changes in depreciation:
Years Straight-line depreciation Yearly depreciation (SYD) Variation
1 $90,000 $150,000 ($60,000)
2 $90,000 $120,000 ($30,000)
3 $90,000 $90,000 Nil

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4 $90,000 $60,000 $30,000
5 $90,000 $30,000 $60,000
After change in the overall procedure of depreciation, the amount pertaining to
depreciation would rise in the initial years. However, the declining trend could be observed in
the later years (Demski 2017). This would enable in maintaining the consistency of the overall
profits over the periods because of the reduction of the expense in depreciation over the periods.
Thus, Maria Mars has performed the role of modifying the method of depreciation from the
method of straight-line to the method of the sum-of-years-digits. The goal was to meet the
objectives of Peter Pringle, the general manager of Pringles Limited, to the accountant of the
organisation, Marion Mason.

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References:
Demski, J.S., 2017. Accounting and economics. The new palgrave dictionary of economics,
pp.1-6.
Ji, X.D., 2017. Development of accounting and auditing systems in China. Routledge.
Kotas, R., 2014. Management accounting for hotels and restaurants. Routledge.
Yussof, S.H., Isa, K. and Mohdali, R., 2014. An analysis of the gap between accounting
depreciation and tax capital allowance in Malaysia. Procedia-social and behavioral
sciences, 164, pp.351-357.