Page 419 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

products, major appliances, industrial products, and high-performance engineered plastics. It
uses an accelerated method for most of its property, plant, and equipment; however, it
depreciates some assets on a straight-line basis, while the company's mining properties are

depreciated under the units-of-production method.

In the illustrations of the four depreciation methods that follow, we assume the following: On 2010 January 1, a
company purchased a machine for USD 54,000 with an estimated useful life of 10 years, or 50,000 units of output,
and an estimated salvage value of USD 4,000.
Straight-line method Straight-line depreciation has been the most widely used depreciation method in
the United States for many years because, as you saw in Chapter 3, it is easily applied. To apply the straight-line
method, a firm charges an equal amount of plant asset cost to each accounting period. The formula for calculating

depreciation under the straight-line method is:
Asset cost – Estimatedsalvage value
Deprecation perperiod=
Number of accounting periods forestimated usefullife
Using our example of a machine purchased for USD 54,000, the depreciation is:
$54,000−$4,000 =$5,000 per year
10years
In Exhibit 83, we present a schedule of annual depreciation entries, cumulative balances in the accumulated
depreciation account, and the book (or carrying) values of the USD 54,000 machine.
Using the straight-line method for assets is appropriate where (1) time rather than obsolescence is the major
factor limiting the asset's life and (2) the asset produces relatively constant amounts of periodic services. Assets that

possess these features include items such as pipelines, fencing, and storage tanks.
Units-of-production (output) method The units-of-production depreciation method assigns an equal
amount of depreciation to each unit of product manufactured or service rendered by an asset. Since this method of
depreciation is based on physical output, firms apply it in situations where usage rather than obsolescence leads to
the demise of the asset. Under this method, you would compute the depreciation charge per unit of output. Then,
multiply this figure by the number of units of goods or services produced during the accounting period to find the
period's depreciation expense. The formula is:

Asset cost – Estimatedsalvage value
Deprecation per unit=
Estimated total units of production serviceduringusefullife of asset
Depreciation per period=Deprecation per unit×Number of units of goods/services produced
You would determine the deprecation charge for the USD 54,000 machine as:
USD54,000 – USD4,000 =$1per unit
50,000 units

Accounting Principles: A Business Perspective 420 A Global Text