Depreciation Methods

$1.$ Straight$-$line

$2.$ Declining balance

$3.$ Units$-$of$-$activity

$4.$ Modified Accelerated Cost Recovery System $($as in textbook$)$

Management selects the method it believes best measures an asset$$s contribution to revenue over its useful life. Once a company chooses a method, it should apply that method consistently over the useful life of the asset.

Our illustration of the first three depreciation methods, is based on the following data relating to a small delivery truck purchased by Bill$$s pizza on January $1,2022.$

Straight$-$line Depreciation Method: Companies expense an equal amount of depreciation each year of the asset$$s useful life.

To compute the annual depreciation expense, we divide the depreciable cost by the estimated useful life. Where depreciable cost is equal to the installed cost of the asset less its salvage value. The figure below shows the computation of depreciation expense in the first year for Bill$$s Pizzas$$ delivery truck.

Alternatively, we can compute an annual rate at which depreciates the delivery truck. In this case the rate is $20\%(100\%5$ years$).$ When an annual rate is used under the straight line method, the company applies the percentage rate to the depreciable cost of the asset, as shown in the depreciation schedule below:

Note that the depreciation expense of $$2,400$ is the same each year. The book value at the end of the useful life is equal to the estimated $$1,000$ salvage value.

Questions:

$1.$ What happens when an asset is purchased during the year, rather than on January $1$st as in our example?

$2.$ On January $1,2022,$ Iron Mountain Ski Corporation purchased a new snow$-$grooming machine for $$50,000.$ The machine is estimated to have a $10-$year life with a $$2,000$ salvage value. What is the depreciation expense for the machine using straight line depreciation? What would be the accumulated depreciation value after $3$ years?

Declining$-$Balance Method. Computes depreciation expense using a constant rate applied to a declining book value. This method is called an accelerated$-$depreciation method because it results in higher depreciation in the early years of an asset$$s life than does the straight$-$line approach. However, because the total amount of depreciation $($the depreciable cost$)$ taken