4.6: Summary

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An asset costs $27,000, has a residual value of $900, and has a three-year or 8,700-hour useful life. The company used the asset as follows: 2,200 hours in 2012; 2,500 hours in 2013; 2,700 hours in 2014; and 2,400 hours in 2015.

Method

Process

Comments

Example (below)

Straight-Line

\(\ \frac{\text{

Cost - Residual value

}}{\text{

Useful life in years

}}\)

Asset is fully depreciated once it has been used the number of years in its useful life.

$\ \frac{27,000 - 900}{3}$

= 8,700 per year

Units of Production

\(\ \frac{\text{

Cost - Residual value

}}{\text{

Useful life in hours

}}\)

Multiply hourly rate times number of hours used in the year. Asset is fully depreciated once it has been used the number of hours in its useful life.

$\ \frac{27,000 - 600}{8,700}$

= $3 per hour

2,100 in year 1 ($3 x 2200 hours)

2,300 in year 2 ($3 x 2500 hours)

2,600 in year 3 ($3 x 2700 hours)

1,700 in year 4 ($3 x 2400 hours)

Declining Balance (“Twice the straight-line rate” just means to divide 2 by the number of years)

Multiply the book value at the beginning of each year by 2/ number of years to determine the amount for the adjusting entry.

Do not subtract out residual value at the beginning (which you did for straight-line.)
In the last year, the depreciation amount is the difference between whatever the current book value is minus the residual value - do not depreciate lower than the residual value in the last year.

	BV	x	Rate	=	Amt. of Dep.
Year 1	27,000 $\ \underline{-18,000}$	x	2/3	=	6,000
Year 2	9,000 $\ \underline{-6,000}$	x	2/3	=	6,000
Year 3	3,000	-	900	=	2,100