Taking the four (4) methods of depreciation for Fixed/Long-Term/Plant Assets tha

Question

Taking the four (4) methods of depreciation for Fixed/Long-Term/Plant Assets that we have discussed (Straight-line, Double-Declining Balance, Units of Depletion and Units of Production) into consideration, identify the method that would most likely be used by the following, and please briefly explain WHY:

·A mining corporation

· A company wishing to match the expenses of an asset in its early life against the revenue it helped produce

· A company wishing to establish a level amount of expense over the asset’s life

· A company utilizing machinery dedicated to a specific purpose (stamping, milling, welding, etc.)

Explanation / Answer

The depreciation method along with explanation is provided in the following table:

S.No. Depreciation Method Explanation 1 Units of Depletion Method Units of depletion method is used for all natural resources like mining, petroleum, etc. It is so because, extraction of the natural resource over a period of time results in the depletion of the actual value of such resource. 2 Double-Declining Balance Double-declining balance results in more depreciation in the early years of the useful life of an asset. A new asset will obviously produce more revenue in the early years of its useful life. Double-declining method, therefore, helps in matching the revenue generated by a new asset in its beginning years. 3 Straight-Line Method Straight-line method results in the cost of an asset (adjusted for salvage value) to be allocated in a specific and constant amount over the useful life of the asset. 4 Units of Production Method Units of production method is based on the concept of depreciation of an asset on the basis of units produced by it. Therefore, the cost of a machinery dedicated to a specific purpose can be distributed on the basis of the units produced by it over a period of time. The number of units may vary each year and therefore, the value of depreciation will not be constant.

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