Page 418 - Accounting Principles (A Business Perspective)

10. Property, plant, and equipment

Number of Companies

Method 2003 2002 2001 2000
Straight-line 580 579 579 576
Declining Balance 22 22 22 22
Sum of year's digits 5 5 6 7
Accelerated method-not specified 41 44 49 53
Units of production 30 32 32 34
Other 4 7 9 10
Source: Based on American Institute of Certified Public Accountants, Accounting
Trends & Techniques
(New York: AICPA, 2004), p. 409.
Exhibit 82: Depreciation method used
In Exhibit 81, note the relationship among these factors. Assume Ace Company purchased an office building for
USD 100,000. The building has an estimated salvage value of USD 15,000 and a useful life of 20 years. The
depreciable cost of the building is USD 85,000 (cost less estimated salvage value). Ace would allocate this
depreciable base over the useful life of the building using the proper depreciation method under the circumstances.
31
Today, companies can use many different methods to calculate depreciation on assets. This section discusses
and illustrates the most common methods—straight-line, units-of-production, and accelerated depreciation method
(double-declining-balance).
As is true for inventory methods, normally a company is free to adopt the most appropriate depreciation method

for its business operations. According to accounting theory, companies should use a depreciation method that
reflects most closely their underlying economic circumstances. Thus, companies should adopt the depreciation
method that allocates plant asset cost to accounting periods according to the benefits received from the use of the
asset. Exhibit 82 shows the frequency of use of these methods for 600 companies. You can see that most companies
use the straight-line method for financial reporting purposes. Note that some companies use one method for certain
assets and another method for other assets. In practice, measuring the benefits from the use of a plant asset is
impractical and often not possible. As a result, a depreciation method must meet only one standard: the

depreciation method must allocate plant asset cost to accounting periods in a systematic and rational manner. The
following four methods meet this requirement.

An accounting perspective:

Business insight

Regardless of the method or methods of depreciation chosen, companies must disclose their
depreciation methods in the footnotes to their financial statements. They include this information
in the first footnote, which summarizes significant accounting policies.
The disclosure is generally straightforward: Sears, Roebuck & Co. operates department stores,
paint and hardware stores, auto supply stores, and eye wear stores. Its annual report states
simply that "depreciation is provided principally by the straight-line method". Companies may
use different depreciation methods for different assets. General Electric Company is a highly

diversified multinational corporation that develops, manufactures, and markets aerospace

31 Because depreciation expense is an estimate, calculations may be rounded to the nearest dollar.

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