Depreciation Methods

Concept

Three Common Methods

1) Straight-line: equal expense each year. 2) Double-declining balance (DDB): accelerated — more expense in early years. 3) Units-of-production: based on actual usage. All three allocate the depreciable base (Cost − Salvage) over the useful life.

Example

Double-Declining Balance

Cost = $100,000, Salvage = $10,000, Life = 5 years. DDB rate = 2 × (1/5) = 40%. Year 1: $100,000 × 40% = $40,000. Year 2: ($100,000 − $40,000) × 40% = $24,000. Year 3: $36,000 × 40% = $14,400. Continue until book value reaches salvage value ($10,000). Note: DDB ignores salvage in the rate calculation but never depreciates below salvage.

Example

Units-of-Production

Cost = $50,000, Salvage = $5,000, Estimated total output = 100,000 units. Rate = ($50,000 − $5,000) / 100,000 = $0.45/unit. If 25,000 units are produced in Year 1: Depreciation = 25,000 × $0.45 = $11,250.

Key Point

CPA Exam Tip

The exam loves testing partial-year depreciation. If an asset is purchased on April 1, only 9/12 of the annual depreciation is recorded in Year 1.

Acquiring Long-Term Assets

Asset Disposal: Sales, Retirements & Exchanges

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Practice Questions