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Depreciation Methods and Calculation

   

Added on  2020-03-04

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MemoTo: Burley DesignsFrom: BA211 StudentDate: 15 August 2017Re: Recommendation regarding depreciation method to Burley DesignsThe purpose of this memo is to make an analysis for depreciation under various methods on a machine purchased by Burley Designs and to recommend the best method.Straight line depreciation methodStraight line method of depreciation is the easiest method to apply depreciation on any asset. Depreciation schedule under this method is,Calculation of yearly depreciationCost of machine $ 18,250.00 (-) Salvage value $ 2,000.00 Depreciable amount $ 16,250.00 (÷) life of the asset7 yearsPer year depreciation $ 2,321.43 Depreciation scheduleYearDepreciable amountCurrent yeardepreciationCumulativedepreciationNet book value0 $ 16,250.00 $18,250.00 1 $ 16,250.00 $ 2,321.43 2,321.43 $ 15,928.57 2 $ 13,928.57 $ 2,321.43 $ 4,642.86 $ 13,607.14 3 $ 11,607.14 $ 2,321.43 $6,964.29 $11,285.71 4 $ 9,285.71 $ 2,321.43 $ 9,285.71 $8,964.29 5 $ 6,964.29 $ 2,321.43 $ 11,607.14 $ 6,642.86 6 $4,642.86 $ 2,321.43 $13,928.57 $ 4,321.43 7 $ 2,321.43 $ 2,321.43 $16,250.00 $2,000.00 Advantages and disadvantages of straight line method
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Advantages:This is easy to understand method; even a non-professional can also use this method easily.This method can be used by small firms easily.This method provides total depreciable amount over the useful life of the asset.Disadvantage:Under this method in the ending years of useful life, the cost of using asset will increase due to an equal amount of depreciation and higher cost of repairing.This method is illogical because in initial years amount of depreciation must be higher and in ending year it must be lower.1Double declining balance method of depreciationDouble declining balance method of depreciation is a technical method to apply depreciation on any asset. Depreciation schedule under this method is,Calculation of yearly depreciation rate on depreciable amountCost of machine$18,250.00 (-) Salvage value$2,000.00 Depreciable amount$16,250.00 life of the asset7 yearsDepreciation rate Under double declining method 2/7 = 28.57%Depreciation scheduleYearRate of depreciationcurrent yeardepreciationCumulativedepreciationNet book value0$18,250.00 128.57%$5,214.29 5,214.29$13,035.71 228.57%$3,724.49 $8,938.78 $9,311.22 328.57%$2,660.35 $11,599.13 $6,650.87 428.57%$1,900.25 $13,499.38 $4,750.62 528.57%$1,357.32 $14,856.70 $3,393.30 628.57%$969.52 $15,826.21 $2,423.79 728.57%$423.79 $16,250.00 $2,000.00 1Archibald, T. R. (1967). The return to straight-line depreciation: An analysis of a change in accounting method.Journal of accounting Research, 164-180.
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