This chapter states that “depreciation is a systematic (yet arbitrary) process of cost allocation that apportions the cost of PPE over its economic useful life. Depreciation matches costs to the periods over which benefits are obtained.” It continues by noting that, for practical purposes, firms tend to use the straight-line and declining balance methods.
Required:
Three methods are introduced in the chapter: straight-line, declining balance, and units- of-production. Assume that for the declining balance method the rate is 2 divided by useful life (which is also called the “double declining balance” method). There are three classes of PPE assets: buildings, factory equipment, and computers. Which of these methods would conceptually be most suitable for each group of assets? Justify your conclusion.