![]() Once a company has invested in a long-lived asset, it must: Assuming no salvage value, the depreciation charge will be calculated as follows: The machine was run 800 hours in year 1, 600 hours in year 2, 350 hours in year 3, and 250 hours in year 4. A year’s depreciation expense on an annual income statement will include that year’s production as a fraction of total estimated lifetime production from the asset.Ī company bought a machine at $10,000 and expects that the machine would run for 2,000 hours during its life. Unlike the time based methods of straight line and accelerated depreciation, the Units-of-Production (U-O-P) depreciation method is activity based. When the book value of the asset reaches its salvage value, no more depreciation expense will be recognized. Note that the DDB depreciation calculation does not include salvage/residual value. SYD Depreciation Expense for Year “i” = (Cost – Salvage Value) * ((n – “# of the ith year” +1))/SYD DDB MethodsĭDB method accelerates the depreciation rate of the straight line method.ĭDB Expense = (Cost – Accumulated Depreciation) * (2/n)ĭDB depreciation in year 1 = 1,000*2/4 = 500ĭDB depreciation in year 2 = (1,000 – 500)*2/4 = $250 The year two depreciation expense under the SYD method for the company will be calculated as follows: This conveyor belt cost $100,000 and has a salvage value = $0. SYD Example: If a company’s factory has a new conveyor belt with a useful life of 5 years, then SYD = 1+2+3+4+5 = 15. SYD method treats an asset as more useful in its early life by raising the depreciation expense for the early years. ![]() The two common accelerated depreciation methods are: Sum-of-the-Years Digits (SYD) expensing and Double Declining Balance (DDB) expensing. ![]() Residual amount is the amount received after disposal of the asset.Īnnual charge for depreciation = (1,000 – 200)/4 = $200 Accelerated Depreciation MethodsĪccelerated depreciation methods allow higher depreciation to be charged in the early years, and lower depreciation in the later periods. It is the period over which the firm intends to use the asset. Note that useful economic life is not equal to physical life. Under this method, depreciation is computed by dividing the depreciable amount of the asset by the expected number of accounting periods of its useful life. The straight-line method associates the long-lived asset’s usefulness with its age. We will study the following methods of depreciation: The cost of the asset purchased should be spread over the periods in which the asset will benefit a company. ![]() According to the matching concept, revenues should be matched with expenses in order to determine the accounting profit. Depreciation is defined as the ‘allocation of the depreciable amount of an asset over its estimated life’. ![]()
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