Compute And Record Depreciation Using The Straight-Line Meth

Compute and record depreciation using the straight-line, units-of- production, and declining-balance methods

On January 1, the Matthews Band pays $65,600 for sound equipment. The band estimates it will use this equipment for five years and perform 200 concerts. It estimates that after five years it can sell the equipment for $2,000. During the first year, the band performs 45 concerts. Compute the first-year depreciation using the straight-line method.

Calculate the first-year depreciation expense by subtracting the salvage value from the cost, dividing by the estimated useful life. The calculation is as follows: (Cost - Salvage Value) / Estimated Useful Life = ($65,600 - $2,000) / 5 years = $12,720. During the first year, with 45 concerts performed out of 200 total, the proportionate depreciation is applied based on the total usage if needed, but for straight-line, the annual depreciation is fixed at $12,720.

Next, compute the depreciation using the units-of-production method. The rate per concert is determined by dividing the depreciable cost by total estimated concerts: (Cost - Salvage Value) / Total concerts = ($65,600 - $2,000) / 200 = $318 per concert. Since 55 concerts were performed in the first year, the depreciation expense is 55 x $318 = $17,490.

Finally, calculate depreciation using the double-declining-balance method. The depreciation rate is double the straight-line rate: 100% / 5 years = 20%; doubled to 40%. The first-year depreciation is 40% of $65,600 = $26,240. The book value at the end of the first year is $65,600 - $26,240 = $39,360.

In the second year, the depreciation expense under the double-declining-balance method would be 40% of the book value at the start of the year, which is $39,360, resulting in $15,744.

The calculation of depreciation in each method illustrates different approaches and outcomes for asset cost allocation over time, emphasizing the importance of choosing the appropriate method based on asset usage and financial strategy.

Paper For Above instruction

Depreciation accounting is a vital aspect of financial reporting, allowing organizations to allocate the cost of tangible assets over their useful lives systematically. Different methods exist, each suited for various scenarios, with the three most common being the straight-line, units-of-production, and declining-balance methods. This paper examines the computation of depreciation under these methods, using a case study of the Matthews Band’s sound equipment purchase as an illustrative example.

The Matthews Band acquired sound equipment costing $65,600 at the start of the year, with an estimated useful life of five years and a salvage value of $2,000. Over these five years, it anticipates performing 200 concerts, with a first-year concert count of 45. The choice of depreciation method affects how expenses are allocated annually, impacting financial statements and tax liabilities.

Straight-Line Method

The straight-line method assumes equal expense allocation across the asset’s useful life. The annual depreciation expense is calculated by subtracting the estimated salvage value from the initial cost and dividing by the estimated useful years:

Depreciation Expense = (Cost - Salvage Value) / Useful Life

For the equipment in question: ($65,600 - $2,000) / 5 = $12,720 annually. During the first year, with 45 concerts performed, the depreciation remains at this fixed amount, reflecting consistent expense recognition regardless of the actual usage.

Units-of-Production Method

This method allocates depreciation based on actual usage, making it ideal for assets where wear and tear correlate directly with activity levels. The per-unit depreciation rate is determined by dividing the depreciable cost by the total estimated units of production:

Depreciation Rate per Unit = (Cost - Salvage Value) / Total Estimated Units

Applying this to the case: ($65,600 - $2,000) / 200 concerts = $318 per concert. Given the first-year concert count of 55, depreciation expense is 55 x $318 = $17,490. This method aligns expenses closely with actual asset usage, providing a more accurate reflection of wear.

Declining-Balance Method

The declining-balance method accelerates depreciation, recognizing higher expenses in the initial years. The depreciation rate is double the straight-line rate: 40%. The depreciation expense for each year is calculated by multiplying the current book value by this rate:

Depreciation Expense = Book Value x Rate (40%)

At the start of the first year, the expense is $65,600 x 40% = $26,240. The book value after first-year depreciation is $39,360. In the second year, depreciation becomes $39,360 x 40% = $15,744, reducing the book value further.

Implications and Practical Considerations

The selection of a depreciation method should consider the nature of the asset, usage patterns, and financial reporting needs. The straight-line method offers simplicity and consistent expenses, beneficial for assets with stable utility. The units-of-production method provides precise matching of expense with usage, suited for machinery or equipment with variable activity. The declining-balance method accelerates depreciation, benefiting organizations seeking tax advantages or reflecting higher early-use wear and tear.

In practical applications, companies often combine methods or switch depreciation techniques based on changing circumstances. Accurate depreciation calculations are essential for complying with accounting standards, planning future capital expenditures, and assessing asset value.

Overall, understanding these methods and their calculations fosters better financial management and strategic decision-making, reinforcing the importance of appropriate depreciation accounting.

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