Accounting Q26-30
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Exhibit 15.Straight Line MethodDepreciation expense in a year: (Acquisition cost – Salvage value) ÷ Useful life in yearsExample: Acquisition cost $2,200 Useful life 4 years Salvage value $200 Depreciation percentage: 100 ÷ № of useful life in years 100 ÷ 4 years = 25% Depreciation expense: ($2,200 – $200) ÷ 4 years = $500 per year Advantages of the method:Easy to calculateApplicable to the majority of non-current assetsEasy to use in planning Disadvantages of the method:Every year the depreciation expense is the same in theIncome statement, although the contribution to the business is lower as the asset is older As time goes by, the repair and maintenance costs are higher and higher which causes a higher total expense for this asset in late years 8/8Decreasing Charge MethodsDeclining balance methodThis method applies a depreciation rate to the book value of the asset at the beginning of each year. As the book value decreases, so does the depreciation charge. The rate is calculated by a mathematical formula, but for the sake of simplicity, we will use a predetermined rate given for each case. Following the previous example, the rate according to the calculation is 45% (rounded). Then: Acquisition cost $2,200Depreciation in Year 1 is: $2,200 × 45% 990Balance at the start of Year 2: $1,210Depreciation in Year 2: $1,210 × 45% 545 (rounded)Balance at the start of Year 3: $ 665Depreciation in Year 3: $665 × 45% 299 (rounded)Balance at the start of Year 4: $ 366Depreciation in Year 4: 166*Balance at the end of the lifetime $ 200*The ending amount must be equal to the salvage value, therefore no need to calculate in the last year the exact amount, which will be different from the required sum thanks to rounding error. Two short-cut ways to calculate the required rate:Double declining balance (DDB)The straight line % is multiplied by 2. This is: SL 25% × 2 = 50%X % declining balanceE.g. 180% estimation × SL 25% = 45% 8/9
2 Sum-of-the-years’ digit method Sum of the years: 1 + 2 + 3 + 4 = 10 Year Depreciation expense 1 4/10 × 2,000 = 800 2 3/10 × 2,000 = 600 3 2/10 × 2,000 = 400 4 1/10 × 2,000 = 200 2,000Advantages of the two decreasing charge methods:* Both the declining balance and the sum-of-the-years digit method reflect the intensive use of the asset in early years. * The calculation is easier in case of sum-of-the-year digit method than the exact calculation of the declining balance percentage. Disadvantage of the two methods: * Their use is limited to specific kind of assets. 8/10Units of Service Method Using the original data, additional information is the following: Year 1 3,000 units of output 2 2,500 “ 3 1,500 “ 4 1,000 “ Total 8,000 units of output Solution: Cost of one unit: ($2,200 – $200) ÷ 8,000 units = $0.25 Depreciation expense: Year 1 3,000 units × $0.25 = $ 750 2 2,500 “ × $0.25 = 625 3 1,500 “ × $0.25 = 375