Page 422 - Accounting Principles (A Business Perspective)

10. Property, plant, and equipment

Method Base Calculation
Asset Estimated Cost - Number of accounting periods in Base estimated
Straight-line
salvage value useful life
Double-declining balance Asset - Accumulated% Base X (2 X Straight-line rate)
%Cost - Depreciation
Exhibit 85: Summary of depreciation methods
Look at the calculations for the USD 54,000 machine using the DDB method in Exhibit 84. The straight-line rate
is 10 per cent (100 per cent/10 years), which, when doubled, yields a DDB rate of 20 per cent. (Expressed as
fractions, the straight-line rate is 1/10, and the DDB rate is 2/10.) Since at the beginning of year 1 no accumulated

depreciation has been recorded, cost is the basis of the calculation. In each of the following years, book value is the
basis of the calculation at the beginning of the year.
In the 10th year, you could increase depreciation to USD 3,247 if the asset is to be retired and its salvage value is
still USD 4,000. This higher depreciation amount for the last year (USD 3,247) would reduce the book value of USD
7,247 down to the salvage value of USD 4,000. If an asset is continued in service, depreciation should only be
recorded until the asset's book value equals its estimated salvage value.
For a summary of the three depreciation methods, see Exhibit 85.
In Exhibit 86, we compare two of the depreciation methods just discussed—straight line and double-declining
balance—using the same example of a machine purchased on 2010 January 1, for USD 54,000. The machine has an

estimated useful life of 10 years and an estimated salvage value of USD 4,000.

An accounting perspective:

Uses of technology

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So far we have assumed that the assets were put into service at the beginning of an accounting period and
ignored the fact that often assets are put into service during an accounting period. When assets are acquired during
an accounting period, the first recording of depreciation is for a partial year. Normally, firms calculate the
depreciation for the partial year to the nearest full month the asset was in service. For example, they treat an asset
purchased on or before the 15th day of the month as if it were purchased on the 1st day of the month. And they treat
an asset purchased after the 15th of the month as if it were acquired on the 1st day of the following month.
To compare the calculation of partial-year depreciation, we use a machine purchased for USD 7,600 on 2010

September 1, with an estimated salvage value of USD 400, an estimated useful life of five years, and an estimated
total units of production of 25,000 units.

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