Menu
Home
Log in / Register
 
Home arrow Accounting arrow Long-Term Assets
< Prev   CONTENTS   Next >

10. The Straight-Line Method

Under this simple and popular approach, the annual depreciation is calculated by dividing the depreciable base by the service life. An asset that has a $100,000 cost, $10,000 salvage value, and a four-year life would produce the following amounts:

Depreciation Expense

Accumulated Depreciation at

End of Year

Annual Expense Calculation

Year l

$22,500

$22,500

($100,000 - $10,000)/4

Year 2

$22,500

$45,000

($100,000 - $10,000)/4

Year 3

$22,500

$67,500

($100,000 - $10,000)/4

Year 4

$22,500

$90,000

($100,000 - $10,000)/4

For each of the above years, the journal entry to record depreciation is as follows:

12-31-XX

Depreciation Expense

22,500

Accumulated Depreciation

22,500

To record annual depreciation expense

The applicable depreciation expense would be included in each year's income statement (except in a manufacturing environment where some depreciation may be assigned to the manufactured inventory, as will be covered in the managerial accounting chapters later in this book series). The appropriate balance sheet presentation would appear as follows (end of year 3 in this case):

Equipment $ 100,000

Less: Accumulated depreciation on equipment (67,500) 32,500

10.1. Fractional Period Depreciation

Assets may be acquired at other than the beginning of an accounting period, and depreciation must be calculated for a partial period. With the straight-line method the amount is simply a fraction of the annual amount. For example, an asset acquired on the first day of April would be used for only nine months during the first calendar year. Therefore, year one depreciation would be 9/12 of the annual amount. Following is the depreciation table for the above asset, this time assuming an April 1 acquisition date:

Expense

Accumulated Depreciation End of Year

Depreciation at Annual Expense Calculation

Year 1

$16,875

$16,875

(($100,000 - $10,000)/4) X 9/12

Year 2

$22,500

$39,375

($100,000 - $10,000)/4

Year 3

$22,500

$61,875

($100,000 - $10,000)/4

Year 4

$22,500

$84,375

($100,000 - $10,000)/4

Year 5

$ 5,625

Not applicable - assumed disposed

(($100,000 - $10,000)/4) X 3/12 on March 31

10.2. Spreadsheet Software

Microsoft Excel (and competing products) include built-in depreciation functions that may be entered by setting formulas (which can also be easily accessed from the Insert Function commands). Below is a screen shot showing the straight-line method function. On execution, this routine returns the $22,500 annual depreciation value to the C5 cell of the worksheet.

11. The Units-of-Output Method

This technique involves calculations that are quite similar to the straight-line method, but it allocates the depreciable base over the units of output (e.g., machine hours) rather than years of use. It is logical to use this approach in those situations where the life is best measured by identifiable units of machine "consumption." For example, perhaps the engine of a corporate jet has an estimated 50,000 hour life. Or, a printing machine may produce an expected 4,000,000 copies. In cases like these, the accountant may opt for the units-of-output method. To illustrate, assume Data Nguyen Painting Corporation purchased an air filtration system that has a life of 8,000 hours. The filter costs $100,000 and has a $10,000 salvage value. Nguyen anticipates that the filter will be used 1,000 hours during the first year, 3,000 hours during the second, 2,000 during the third, and 2,000 during the fourth. Accordingly, the anticipated depreciation schedule would appear as follows (if actual usage varies, the schedule would be adjusted for the changing estimates using principles that are discussed later in this chapter):

Depreciation Expense

Accumulated Depreciation at

End of Year

Annual Expense Calculation

Year 1

$11,250

$11,250

1,000 hours/8,000 hours X ($100,000 - $10,000)

Year 2

$33,750

$45,000

3,000 hours/8,000 hours X ($100,000 - $10,000)

Year 3

$22,500

$67,500

2,000 hours/8,000 hours X ($100,000 - $10,000)

Year 4

$22,500

$90,000

2,000 hours/8,000 hours X ($100,000 - $10,000)

The form of journal entry and balance sheet account presentation are just as were illustrated for the straight-line method, but with the revised amounts from the above table.

 
Found a mistake? Please highlight the word and press Shift + Enter  
< Prev   CONTENTS   Next >
 
Subjects
Accounting
Business & Finance
Communication
Computer Science
Economics
Education
Engineering
Environment
Geography
Health
History
Language & Literature
Law
Management
Marketing
Philosophy
Political science
Psychology
Religion
Sociology
Travel