Tag Archives | straight line depreciation

Accelerated Method of Depreciation

See Also:
Depreciation
Straight Line Depreciation
Amortization
Fixed Assets – NonCurrent Assets
Balance Sheet Projections

Accelerated Method of Depreciation Definition

An accelerated method of depreciation definition is any depreciation method that expenses the cost of a tangible asset over its useful life at a rate faster than the straight-line method of depreciation. Furthermore, these methods are generally used to take into account greater deductions that are made over the first few years of an asset. In addition, it is used to minimize taxable income. This is different from the straight-line method because it adds greater depreciation over the first years of an asset. At the same time, the straight-line method spreads the cost evenly in throughout the asset’s life.

Accelerated Method of Depreciation Examples

Examples of accelerated methods of depreciation include the following:


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Accelerated Method of Depreciation, Accelerated Method of Depreciation Definition

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Accelerated Method of Depreciation, Accelerated Method of Depreciation Definition

Originally written by  on July 23, 2013

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Double-Declining Method Depreciation

See Also:
Double-Declining Depreciation Formula
Accelerated Method of Depreciation
Double-Declining Method Depreciation
Straight-Line Depreciation
Depreciation
GAAP
Fixed Assets – NonCurrent Assets

Double Declining Depreciation: Definition

Double-declining depreciation, defined as an accelerated method of depreciation, is a GAAP approved method for discounting the value of equipment as it ages. It depreciates a tangible asset using twice the straight-line depreciation rate.

Double Declining Depreciation: Explanation

Double declining depreciation, explained as one of the most common methods to depreciate tools, is everywhere. The idea is that the asset’s value declines more steeply in the early years of usage. The result is that the depreciation expenses are larger in beginning and then get smaller over time.

Companies often use this method of depreciation for tax purposes. Because the depreciation expenses are larger in the early periods of the asset’s useful life, the

savings are greater in the beginning of the depreciation cycle and the tax benefits come sooner.

Double-Declining Balance Method: Schedule

When using double-declining balance method schedule, the depreciation rate stays the same, the depreciation expense gets smaller each period, and the depreciable base gets smaller each period.

Begin with the depreciable base, and then calculate the depreciation expense for the period. Subtract that depreciation expense from the depreciable base to get the depreciable base for the next period. Repeat this process until you reach the salvage value. If the final depreciation expense would bring the asset value below salvage value, then simply subtract salvage value from that period’s depreciable base to get the final depreciation expense.

For example, if you have an asset with a purchase price of $1,000, a salvage value of $100, and a useful life of 5 years, then the straight-line depreciation rate will be 20%. The double-declining depreciation rate would then be 40%. The double declining depreciation table for the asset would look like this:

YearDepreciable Base      Depreciation Rate      Depreciation Expense

  1    $1,000                  40%                               $400
  2    $600                    40%                               $240
  3    $360                    40%                               $144
  4    $216                    40%                               $86.40
  5    $129.60                  -                                $29.60

 

Double Declining Depreciation: Example

Brian is an accountant for small businesses. A trained CPA, Brian uses his skills to make sure each of his client businesses receives the financial management it needs.

He is approached by a customer who needs to depreciate his equipment. Brian naturally turns to double declining depreciation, GAAP compliance, simple application, and other benefits of this method make it a perfect fit for this job. Brian then collects information and performs the calculation below:

Purchase price is $1,000; Salvage value is $100; and useful life is 5 years

Depreciable Base = $1,000 – $100 = $900

Depreciation Expense = $900 / 5 = 180

Double Declining Depreciation Rate = $180 / $900 = 20%

Brian finds that the double declining depreciation method, here, yields a rate of 20%. He then creates the schedule above. This allows a clear understanding of how each depreciation expense relates to time.

Brian knows the value of financial management. Where many potential clients have failed, he has led many of his customers to success through this alone. He values the double declining depreciation schedule he has created here because it may create the same effect for this client.

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Double-Declining Depreciation Formula

See Also:
Double-Declining Method Depreciation

Double-Declining Depreciation Formula

To implement the double-declining depreciation formula for an Asset you need to know the asset’s purchase price and its useful life.

First, Divide “100%” by the number of years in the asset’s useful life, this is your straight-line depreciation rate. Then, multiply that number by 2 and that is your Double-Declining Depreciation Rate. In this method, depreciation continues until the asset value declines to its salvage value.

Use the following formula to calculate straight-line depreciation rate:

Straight-line Depreciation Rate = Depreciation Expense / Depreciable Base

Use the following formula to calculate double-declining depreciation rate:

Double-declining Depreciation Rate = Straight-line Depreciation Rate x 2

Double-Declining Method Calculation Example:

Fedcorp Industries made a purchase of a delivery van to transport merchandise. The van purchase price is $1,000. Fedcorp also determines that the van’s will retain a useful life of 5 years. Using the information that the company has determined, how would Fedcorp Industries determine the double-declining depreciation rate on the delivery van?

First Divide 100% by 5 years

100% / 5 = 20%

Then, multiply that percentage by 2

20% x 2 = 40%

Your Double-Declining Depreciation rate is 40% . Which translates to depreciation of $400 per year for the company’s van.

Stop Calculating depreciation in the year after the depreciable cost falls below the salvage value of the vehicle.

 

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Asset Disposal Definition

See Also:
Current Assets
Fixed Assets
Balance Sheet
Income Statement
Depreciation

Asset Disposal Definition

Asset disposal is the act of selling an asset usually a long term asset that has been depreciated over its useful life like production equipment.

Disposal of Assets Explanation

According to its depreciation, many companies contain an asset disposal policy to replace equipment. When companies sell this equipment it gains a salvage value or residual value which can be a gain or a loss per the books. You must submit his gain or loss for disposal assets accounting on the income statement as a part of net income. It should also be noted that the company will need to reduce the amount of value left with the asset if it was not reduced to zero per depreciation.

Disposal of Assets Example

For example, Stitch Company is a textile manufacturer specializing in t-shirts, but provides other textile services as well. Stitch Co. equipment used to make the t-shirts and other clothing products. Note that these products only have a useful life of five years. Currently, there is one piece of equipment which has broken down. After assessing the damage, Stitch Company maintenance staff has confirmed that it would be cheaper. In addition it would be more efficient for production to sell and replace the equipment.

The company uses the straight line method of depreciation, and the original cost of the equipment is $20,000. The depreciation on the equipment is equal to $15,000 or 4 years of depreciation. Stitch was able to sell the equipment for $6,000. Therefore, Stitch must recognize a gain on the income statement of $1000. If you take the $6,000 sale price and subtract the $5,000 book value of the equipment from it, you will find the gain on the income statement. If the sale price were $4,000, rather than $6,000, you would find a loss of $1,000 listed on the Income Statement.

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Disclosure of Accounting Changes

See Also:
Accounting Principles
Probable Losses
Subsequent Events
Business Segments
How to Make Dramatic Changes in Business
Planning Your Exit Strategy
Percentage Completion Method
What Your Banker Wants You To Know

Accounting Changes

Accounting changes and error corrections are the switch from one principle of accounting to another – like with inventory and recognition of revenue. Error corrections come from an accounting change in estimates, such as accounting changes in depreciation method for assets or how it might record the company uncollectible accounts. For example, a company might decide that it needs to switch to straight line depreciation from an accelerated method. This makes it easier and in line for tax purposes. Companies might also decide that a better way of accounting for its inventory is to adopt the Last in First out (LIFO) method; instead of a First in First out (FIFO) method.

Disclosure of Accounting Changes

Regardless of the accounting change, when a company adopts a new method of accounting, GAAP requires companies to disclose these changes in the financial statements. Whenever the company is writing its notes to inform the (potential) investor, it must announce the specific change first. Then it is required to announce the impact that this change will have upon the company’s income and the balance sheet.

Accounting Changes Example

Jimbo Slice works for a toy manufacturer by the name of Awesome Toy Co. The economy has recently gone through a downturn and the company expects that it will not receive a larger amount of its accounts receivable because many of its customers are on the verge of declaring bankruptcy. Jimbo has decided that a change in accounting estimate is needed in regards to the estimation of bad debt expense. At the year end, Jimbo must list this change in estimate on the financial statement and its effect on income which is most likely a reduction.

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accounting changes, Disclosure of Accounting Changes

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