Kindly illustrate various depreciation methods.

I will illustrate the following methods of depreciation: straight-line, units of production, double-declining balance, and sum of the years’ digits. These methods can be used for financial reporting. (The depreciation methods for income tax purposes are not illustrated.)

Let’s assume that a plant asset has a cost of $100,000 with an estimated salvage value of $10,000. This makes the depreciable cost $90,000. The asset has a useful life of 5 years or the production of 100,000 parts. The asset is placed into service on January 1, 2007 and the company’s accounting year is January 1 through December 31.

Straight-line: Depreciable cost of $90,000 divided by 5 years = $18,000 of depreciation each year for 5 years.

Units of production: Depreciable cost of $90,000 divided by 100,000 parts = $0.90 per part. In 2007 the company produces 120,000 parts X $0.90 = $108,000 of depreciation. In 2008 the company produces 300,000 parts X $0.90 = $270,000 of depreciation. Continue until accumulated depreciation reaches $90,000.

Double-declining balance: Straight-line depreciation rate is 20% (100% divided by 5 years). Double the straight-line rate is 40% (20% X 2). This rate is applied to the book value of the asset at the beginning of each year. (Book value is cost minus accumulated depreciation.) For the year 2007 the double-declining balance depreciation is: beginning book value of $100,000 X 40% = $40,000. In 2008 the calculation is: beginning book value of $60,000 X 40% = $24,000. Continue until the accumulated depreciation reaches $90,000.

Sum of the years’ digits: Add the digits in the years of useful life: 5+4+3+2+1 = 15. In the first year (2007) multiply 5/15 times the depreciable cost of $90,000 = $30,000 of depreciation. In 2008 multiply 4/15 times $90,000 = $24,000. in 2009 multiply 3/15 times $90,000, and so on.

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