Depreciation

Depreciation

Unit 3

Acquisitions and Payment

Balls and Bats, Inc. purchased equipment on January 1, 2005, at a cost of $100,000. The estimated useful life is 4 years with a salvage value of $10,000.

The purchase of long-lived assets are daily, quarterly and yearly occurrences for many corporations. The cost allocation of the asset is shown through the method of depreciation a company uses. The method a company chooses to incorporate should be one that most effectively matches expenses with the revenues produced. The method that most select is that of straight-line depreciation, which “spreads the depreciable value evenly over the useful life of an asset.” (Horngren, Sundem, Elliott, & Philbrick 2006, p.342) Depreciation schedules reflect how much depreciation will be allocated for each year of the assets useful life. In order to calculate depreciation expense we take the cost of the acquisition minus the estimated residual value divided by the years of estimated useful life. The depreciation schedule using the straight-line method for Balls and Bats, Inc. would be as follows:

Total Acquisition cost= $100,000

Salvage value= $10,000

Estimated useful life= 4 years

Depreciation expense= 100,000 - 10,000 = 22,500

4

D= $22,500 per year

Single-line Depreciation

Balances at End of Year

1 2 3 4

Acquisition cost of

Equipment $ 100,000 $100,000 $100,000 $100,000

Accumulated Depreciation $ 22,500 $ 45,000 $ 67,500 $ 90,000

Net book value $ 77,500 $ 55,000 $ 32,500 $ 10,000

• Balance at the end of year 4 equals salvage value of $10,000

Assets that shows a pattern of depreciation that is written off more quickly than regular straight-line method is referred to as accelerated depreciation. A form of this method is Double-declining balance, more commonly known as DDB. Using this method requires paying close attention to the residual value mainly because an asset can’t be depreciated beyond its estimated residual value. Calculating DBB you compute the straight-line by dividing 100% by the useful life years and then double the rate. Second, figure out depreciation expense by ignoring the residual value and multiplying the assets beginning net book value by the DBB rate.

Total Acquisition cost= $100,000

Straight-line rate=