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# Accounting assigment (Depreciation Memo) - Assignment Example

Summary
Due to the need for managerial analysis, the most suitable method would, therefore, be the straight line depreciation method. Although it may not give values that are closest to actual depreciation,…

## Extract of sample "Accounting assigment (Depreciation Memo)"

Finance and Accounting of Memo Burley Management Topic: Depreciation Memo Purpose The memo’s main objective is to demonstrate the determination of the choice of depreciation method for the new machine.
Recommendation
Information on the depreciation of assets is critical for managerial analysis. Due to the need for managerial analysis, the most suitable method would, therefore, be the straight line depreciation method. Although it may not give values that are closest to actual depreciation, it allows for analysis of expenses as it is easy to understand and use. It does not also have periods where there is no depreciation as is the case with the units of production method.
Straight-Line
Straight-line depreciation method involves depreciating an asset at a uniform rate throughout its useful life. To get the depreciation amount, subtract the scrap value from the cost of the machine and then divide it by the useful life of the machine (Weil, Schipper, and Francis, 2012).
Year
Depreciation Expense
Accumulated Depreciation
Book Value
1
\$2,321.43
\$2,321.43
\$15,928.57
2
\$2,321.43
\$4,642.86
\$13,607.14
3
\$2,321.43
\$6,964.29
\$11,285.71
4
\$2,321.43
\$9,285.71
\$8,964.29
5
\$2,321.43
\$11,607.14
\$6,642.86
6
\$2,321.43
\$13,928.57
\$4,321.43
7
\$2,321.43
\$16,250.00
\$2,000.00
This method is simple to use. Its calculations are easy as the same amount of depreciation applies for each year. There is, therefore, no need for recalculating the value again unless there is a revaluation of the asset. It is also easy to forecast future income since you already know what your depreciation will be (Weil, Schipper, and Francis, 2012).
The method tends to ignore the fact that assets lose value faster during the first years of use. Since the method applies uniform depreciation on the asset throughout its life, it may give a higher book value than the actual value. In later years, the asset may seem to offer more value than it gives. That is if depreciation is to form the basis of the assessment.
Units of Production
Under this method, depreciation of an asset depends on the level of activity during that period. A period where the output level is high would record higher depreciation values comparative to years with low production. To get the amount of depreciation, divide the depreciable amount by the total expected units the machine would produce in its lifetime and then multiply the answer by the period’s production (Weil, Schipper, and Francis, 2012).
Year
Depreciation Expense
Accumulated Depreciation
Book Value
1
\$1,566.96
\$1,566.96
\$16,683.04
2
\$1,654.02
\$3,220.98
\$15,029.02
3
\$1,741.07
\$4,962.05
\$13,287.95
4
\$1,880.36
\$6,842.41
\$11,407.59
5
\$1,973.21
\$8,815.63
\$9,434.38
6
\$2,089.29
\$10,904.91
\$7,345.09
7
\$2,216.96
\$13,121.88
\$5,128.13
The units-of-production method produces the closest estimate of depreciation to actual depreciation. Since it uses activity level as a basis for determination of depreciation, it fairly allocates depreciation to the periods as per the usage of the asset. In so doing, it matches the depreciation expense to revenue generated by the asset.
In periods where there is no activity, there would be no depreciation. That is despite the fact that the asset would still lose value. The method may also not be applicable to assets whose relationship to production is not direct and hence will not depend on activity level. Assets such as buildings depreciate with the passage of time and therefore it may not be possible to depreciate them using this method.
Double Declining
The double-declining method uses a depreciation rate to accelerate an asset’s depreciation in the early years of an asset’s life. It doubles the rate of depreciation under the straight-line method and applies it to the book value of the asset (Weil, Schipper, and Francis, 2012). That gives the depreciation expense for the period.
Year
Depreciation Expense
Accumulated Depreciation
Book Value
1
\$4,642.86
\$4,642.86
\$13,607.14
2
\$3,461.70
\$8,104.56
\$10,145.44
3
\$2,581.03
\$10,685.59
\$7,564.41
4
\$1,924.41
\$12,610.00
\$5,640.00
5
\$1,434.83
\$14,044.83
\$4,205.17
6
\$1,069.81
\$15,114.64
\$3,135.36
7
\$797.65
\$15,912.29
\$2,337.71
Since the method accelerates an asset’s depreciation, it reduces the tax expense as taxable income reduces in the early years. It also allocates the most depreciation to the years an asset is most useful.
It is more complex than the other methods in terms of calculations. It is also of little help in the managerial analysis due to the constant changes in expenses.
References
Weil, R.L., Schipper, K. and Francis, J., (2012). Financial Accounting: An Introduction to Concepts, Methods and Uses. Mason: Cengage Learning. Read More
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