...The straight-line method of depreciation spreads the expense of depreciation evenly over the life of the asset. An advantage of this method is that it is a very straightforward approach and is uncomplicated and easy for users to understand and apply. However a disadvantage is because a company is paying the same depreciation amount every period it does not account for the loss of efficiency or repair expenses that an older piece of equipment may need. This method is commonly used for financial reporting because of it easy process and application. The accelerated method of depreciation has the company paying higher depreciation expenses in the early life of the asset and lower expenses in the later years. With the accelerated method the company has larger depreciation in early years and will report less profit in early years and more profit in later years. An advantage to this method is the effects on the company’s income tax return. A higher depreciation in early years will mean an immediate income tax saving which is appealing. Another advantage would be offsetting the company’s income and lowering taxes. However this can also be a disadvantage by offsetting their income they have a lower reported income which can make it difficult to gain investors or get a loan from a bank. This method could also cause a company to rush replacement of efficient equipment when the tax benefit slows down. The company would then be replacing perfectly functioning equipment and creating a large...
Words: 296 - Pages: 2
...CheckPoint: Differentiating Depreciation Methods Page 74 Study Question 2.4: Discuss the difference between the straight-line method of depreciation and the accelerated methods. Why do companies use different depreciation methods for tax reporting and financial reporting? Straight-Line depreciation is “Method that allocates the cost of an operational asset in equal periodic amounts over its useful life.” (Libby, A., & Short, 1998) Accelerated Depreciation is “Methods that result in higher depreciation expense in the early years of an operational asset’s life and lower expense in the later years”. (Libby, A., & Short, 1998) The differences are straight forward the Straight-Line keeps the same cost until the piece of equipment is no longer useful. The Accelerated Depreciation Method starts out with a larger amount of money and dwindles down as the piece of equipment deteriorates. “Depreciation expense reduces the amount of reported net income for a company, but it does not reduce the amount of cash generated by the company because it is a noncash expense. That is why, on the statement of cash flows, depreciation expense is added back to net income (accrual basis) to compute cash flows from operations.” (Libby, A., & Short, 1998) The reasons that companies use the different depreciation methods for tax reporting and financial reporting is due to income tax is based on income, depreciation is a deductible expense. “The higher the amount of depreciation recorded by a company...
Words: 281 - Pages: 2
...tangible assets over time is considered depreciation. Most commonly used method is the straight line depreciation. With a method like this there are charges that are spread throughout the life of the asset evenly. In this method depreciation is charged constantly throughout every year. This occurrence allows more smoothing of income where there was gradual change over its useful life of assets without highs and lows. The accelerated method of depreciation concludes that assets used heavily during its early years of useful life and within the first few years loses most of value. During this method there will be very heavy depreciation in the early years. With time depreciation decreases and by the assets useful life, depreciation will be zero. Overtime this method does not have constant expense. For tax reporting depreciation is taken from income and the accelerated method allows bigger tax deductions in early years which improve profit. Straight line method also provides the same amount of tax deductions in later years. This is because of the moneys time value and tax saving during the early years is more for the do companies. They use different depreciation methods for the financial reporting purposes. The straight line method would be used because it’s very similar to the benefits derived from assets and the assets actual loss of value. Straight line method charges less depreciation than that of the accelerated method. This means that the company will have more...
Words: 468 - Pages: 2
...Discuss and differentiate straight line method of depreciation and accelerated method. Depreciable assets lose value as time due to aging, obsolescence, wear and tear. The loss in value of tangible assets with time is called depreciation. The most commonly method used is straight line depreciation and in this method charges are spread evenly over the life of an asset. Every year in this method depreciation charged is constant which allows more income smoothing where income has a gradual change over the life of an asset without highs and dips. The accelerated method of depreciation assumes an asset is used heavily during the early years of its useful life then loses most of its value during first few years of use. In early years there will be heavy depreciation. It then decreases with time and by the end of life of an asset, the depreciation becomes zero meaning that this method lacks constant expense over time. Since depreciation is deducted from income for tax reporting, accelerated method allows larger tax deduction in early years that improves profit. Straight line method will also provide the same amount of tax deduction in later years but because of time value of money, tax saving in early years would be better for a company. Why do companies use different depreciation methods for tax reporting and financial reporting? Straight line method is used for financial reporting only since it resembles the benefit derived from an asset and...
Words: 478 - Pages: 2
...E11-4 (Depreciation Computations—Five Methods) Wenner Furnace Corp. purchased machinery for $279,000 on May 1, 2012. It is estimated that it will have a useful life of 10 years, salvage value of $15,000, production of 240,000 units, and working hours of 25,000. During 2013, Wenner Corp. uses the machinery for 2,650 hours, and the machinery produces 25,500 units. a. $279,000 – $15,000 = $264,000; $264,000 ÷ 10 yrs. = $26,400 b. $264,000 ÷ 240,000 units = $1.10; 25,500 units X $1.10 = $28,050 c. $264,000 ÷ 25,000 hours = $10.56 per hr.; 2,650 hrs. X $10.56 = $27,984 d. 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55 OR n(n + 1) = 10(11) 55 "10 X $264,000 X 1/3 = $16,000 55 " 9 X $264,000 X 2/3 = 28,800 55 Total for 2013 $44,800 e. $279,000 X 20% X 1/3 = $18,600 [$279,000 – ($279,000 X 20%)] X 20% X 2/3 = 29,760 Total for 2013 $48,360 E11-8 Goldman Corporation bought a machine on June 1, 2010, for $31,800, f.o.b. the place of manufacture. Freight to the point where it was set up was $200, and $500 was expended to install it. The machine’s useful life was estimated at 10 years, with a salvage value of $2,500. On June 1, 2011, an essential part of the machine is replaced, at a cost of $2,700, with one designed to reduce the cost of operating the machine. The cost of the old part and related depreciation cannot be determined with any accuracy. On June 1, 2014, the company buys a new machine of greater capacity...
Words: 495 - Pages: 2
...Economic Consequences of Firms’ Depreciation Method Choice: Evidence from Capital Investments Scott B. Jackson* University of South Carolina Xiaotao (Kelvin) Liu Northeastern University Mark Cecchini University of South Carolina May 2009 * Corresponding author: Scott B. Jackson, School of Accounting, Moore School of Business, University of South Carolina, Columbia, SC 29208. E-mail: scott.jackson@moore.sc.edu. Phone: (803) 777-3100. Fax: (803) 777-0712. We gratefully acknowledge the comments of S.P. Kothari (the editor), an anonymous referee, Kin Blackburn, Tom Canace, Marc Caylor, Dutch Fayard, Victoria Glackin, Noah Jackson, Scott Whisenant, and Rich White. Electronic copy available at: http://ssrn.com/abstract=1415976 Economic Consequences of Firms’ Depreciation Method Choice: Evidence from Capital Investments Abstract: This study identifies several interrelated reasons why firms’ depreciation method choice is likely to influence managers’ capital investment decisions. We find that firms that use accelerated depreciation make significantly larger capital investments than firms that use straight-line depreciation. Further, we find that there has been a migration away from accelerated depreciation to straight-line depreciation over the past two decades. Firms that make such accounting changes make smaller capital investments in the post-change periods than in the pre-change periods. These results suggest that a choice made for external financial reporting purposes...
Words: 13415 - Pages: 54
...CHAPTER 11 DEPRECIATION, IMPAIRMENTS, AND DEPLETION IFRS questions are available at the end of this chapter. TRUe-FALSe—Conceptual Answer No. Description T 1. Nature of depreciation. F 2. Nature of depreciation. T 3. Depreciation, depletion, and amortization. T 4. Definition of depreciation base. F 5. Factors involved in depreciation process. F 6. Definition of inadequacy. T 7. Objection to straight-line method. F 8. Units-of-production approach. F 9. Accelerated depreciation method. T 10. Declining-balance method. T 11. Group or composite approach. F 12. Use of the composite approach. T 13. Accounting for changes in estimates. F 14. Computation of impairment loss amount. T 15. First step in determining an impairment. T 16. Reporting impaired assets held for disposal. F 17. Method used to compute depletion. T 18. Costs included in depletion base. F 19. Computing asset turnover ratio. T 20 Profit margin on sales ratio. Multiple Choice—Conceptual Answer No. Description d 21. Knowledge of depreciation accounting. b 22. Conceptual rationale for depreciation accounting. c 23. Depreciation and retaining funds. b S24. Definition of depreciation. a S25. Service life vs. physical life. a P26. Definition of depreciable cost. d 27. Economic factors affecting useful service life. d 28. Factors involved in computing depreciation. d 29. Straight-line method assumption. a 30. Activity method of depreciation. a 31...
Words: 10876 - Pages: 44
...not last indefinitely. Over time, these assets depreciate. Depreciation is defined as a non-cash expense that reduces the value of an asset as a result of physical or functional factors over time. Therefore, the costs of the fixed assets should be recorded as an expense over their useful lives, since they depreciate and must be replaced once the end of their useful life is reached. Physical depreciation factors include wear and tear during use or from being exposed to such things as weather. Functional depreciation factors include obsolescence or changes in customer needs that cause the asset to no longer provide services for which it was intended or needed. When it comes to computing depreciation, there are three factors that determine the depreciation expense for a fixed asset: the asset’s initial cost, expected useful life, and estimated residual value. And there are also three different ways to calculate depreciation: the straight –line method, the units-of-production method, and the double-declining-balance method. The straight-line method of depreciation provides the same amount of depreciation expense for each year of the asset’s useful life, and is known to be the most commonly used method of calculating depreciation. The unit’s-of-production method of depreciation provides the same amount of depreciation expense for each unit of production. Based on what the asset is, the unit’s-of-production method can be expressed in terms of quantity produced, miles, hours...
Words: 659 - Pages: 3
... 04/30/12 Re: Types of Depreciation for Assets Depreciation is the process of allocating to expense the cost of an asset according to its useful life. Depletion is the allocation of the expense for natural resources. Amortization is used for the expenses of intangible assets that a company may use. All three need to calculate the useful life of the items being expensed. They also need to have a life span. There are differences between all three, such as depreciation is used for physical assets like buildings, land, and machinery. Depletion on the other hand is used for natural resources such as timber, underground deposit such as oil, and gas. Finally, amortization is for intangible assets like patents, trademarks and goodwill. When calculating depreciation three factors must be determined; cost, salvage value, and useful life. To calculate the depreciable value of the asset one would use the cost less salvage value divided by the useful life of the asset. This would equal the annual depreciation rate of the asset. The straight-line method of depreciation remains the same until the useful life of the asset is used and is the most commonly used method. Calculating depletion requires cost less salvage value divided by estimated units multiplied by number of units extracted and sold. This would equal the annual depletion expense for the asset and is using the units-of-activity method. Last, amortization is calculated similar to depreciation in that the cost of the asset...
Words: 840 - Pages: 4
...- DQs 1. LIFO vs. FIFO The controller of Sagehen Enterprises believes that the company should switch from the LIFO method to the FIFO method. The controller’s bonus is based on the next income. It is the controller’s belief that the switch in inventory methods would increase the net income of the company. What are the differences between the LIFO and FIFO methods? Guided Response: Analyze several of your peers’ posts. Let at least two of your peers know if a company is better off it switches from a LIFO method to a FIFO method? Explain your reasoning. The Differences between the LIFO and FIFO Methods To account for the value of inventory once it is sold, the two common inventory valuations used by companies are LIFO and FIFO. In periods of rising prices (inflation), in LIFO method, there are higher COGS and lower value of inventory and in FIFO method, there is lower COGS and higher value of inventory (Beechy & Et.al, 2011). In periods of falling prices (Deflation), in LIFO method, there are lower COGS and higher value of inventory and in FIFO methods, there is higher COGS and lower value of inventory. The way in which the COGS are calculated is the main difference between these methods of inventory. Consider the purchase of butter at your local grocery store to understand the FIFO inventory method. You are not buying the most recent butter box, but the first butter box placed on the rack. The first butter box is first-out sold...
Words: 1002 - Pages: 5
...Crystal Franklin Date: 05/172014 Re: Recommended Depreciation Method The straight line method of depreciation one of the easiest ways to calculate depreciation expense. The effects on net income is the same over the life of the item that is being depreciated, due to the expense having the same cost every year. To calculate straight line depreciation you take the cost minus the salvage value, than divide the number by the expected life. Double declining balance method of depreciation, uses double the straight line method. Double declining balance is calculated by, first finding the straight line depreciation amount than find the straight line percentage. To find the straight line percentage divide the yearly straight depreciation into the item’s cost minus the salvage value. Once you have the straight line percentage multiply it by two giving the double declining rate. The double declining rate is than multiplied by the cost minus any accumulated depreciation. Double declining balance method deducts larger amount during the early years of the item, this lowers net income early of the item. In the instances of corporations whose costs are based solely on production costs, the units-of-production is the best method. That way if production is low, than the depreciation expense is low, lowering the effect on net income. When the companies production is high, than there is a larger deduction to the net income. The units-of-output method is calculated by taking the cost minus the salvage...
Words: 562 - Pages: 3
...the concept of depreciation. Compute periodic depreciation using different methods. Describe the procedure for revising periodic depreciation. Distinguish between revenue and capital expenditures, and explain the entries for each. Explain how to account for the disposal of a plant asset. Compute periodic depletion of natural resources. Explain the basic issues related to accounting for intangible assets. Questions 1, 2, 3 Exercises 1, 2, 3 2. 4, 5 4 3. 6, 7, 22 3, 4, 5, 6 5, 6, 7 2A, 3A, 4A, 5A 4A 2B, 3B, 4B, 5B 4B 4. 8 7 8 5. 9, 24 8 6. 10, 11 9, 10 9, 10 5A, 6A 5B, 6B 7. 12, 13 11 11 8. 14, 15, 16, 17, 18, 19 12 12, 13 7A, 8A 7B, 8B 10-1 ASSIGNMENT CLASSIFICATION TABLE (Continued) Brief Exercises 13, 14 A Problems 5A, 7A, 9A B Problems 5B, 7B, 9B Study Objectives 9. Indicate how plant assets, natural resources, and intangible assets are reported. Questions 20, 21, 23 Exercises 14 *10. Explain how to account for the exchange of plant assets. 25, 26 15, 16 15, 16 10-2 ASSIGNMENT CHARACTERISTICS TABLE Problem Number 1A 2A 3A 4A 5A Difficulty Level Simple Simple Moderate Moderate Moderate Time Allotted (min.) 20–30 30–40 30–40 20–30 40–50 Description Determine acquisition costs of land and building. Compute depreciation under different methods. Compute depreciation under different methods. Calculate revisions to depreciation expense. Journalize...
Words: 8628 - Pages: 35
...Nicole Dreyer May 25, 2012 ACC/230 Sergio Perez Straight-line depreciation method takes the depreciation and spreads it evenly within each period. If the depreciation in five years would be something like $5,500.00, then each year would show $1,100.00 in depreciation. Accelerated depreciation method shows a higher depreciation in the early years and a lower depreciation in the later years. Taking the same depreciation of $5,500 for five years, this method would split it up differently. A company may show a depreciation of $2,000.00 for the first two years, then only $500.00 for the next three years. Another method is the units of production method this method bases depreciation on the actual use for that period. Most companies use the first two each for different reports. The straight-line method is used for financial reports because it shows a more accurate number for depreciation. The accelerated method is used for tax reporting. This is due to the depreciation lowering the net income, therefore, lowering the taxable income. Straight-line method is good in that it makes comparing and calculating the depreciation easier for each period; however it does not reflect the changes in use of the asset. The asset may be used more in the beginning then as it becomes older it is used less. As well as the tax advantage of the accelerated method, it gives higher cash flow in the early years. The higher cash flow is directly due to the lower taxes. The disadvantage to this is...
Words: 274 - Pages: 2
...differences among valuation, depreciation, amortization, and depletion? The differences among valuation, depreciation, amortization, and depletion are that valuation is the process of valuing a company’s assets for financial reporting purposes. Depreciation is the process of allocation to expense the cost of plant assets over its useful life (or service) in a rational and systematic way. It is used on tangible assets such a property, plant and equipment (with the exception of land). Amortization is a process of allocating cost of a company’s assets over its limited life the differences is that amortization is used for intangible assets such grants, patents, copyrights, franchise and leases Finally, depletion is a process similar to depreciation where instead it allocates cost of company’s assets, specifically natural resources. This includes, oil, coal, natural gas, and timber. Is it appropriate to calculate depreciation using two different methods? Explain why or why not. When it comes to the appropriateness of calculating depreciation with two different methods it is not against the rules to change the method however it is recommend that one method should be used throughout the useful life of the asset because the consistency enhances the comparability of the financial statements. Which depreciation method provides you with the highest depreciation expense in the first year? Explain why. The depreciation method that provides the highest depreciation expense in the first...
Words: 420 - Pages: 2
... the United States has been compelled to cooperate with IFRS. To portray the challenges involved, one large United States company, Clark Corporation, will be explored. At the close of the 2010 financial year, Clark Corporation’s external auditors strongly recommended that they prepare its financial statements using IFRS by January 1, 2012. However, Clark Corporation will encounter various challenges in migrating from depreciating the building under GAAP to IFRS. The component depreciation method is defined as “a method of calculating depreciation where separate items of a building with different useful lives are depreciated on different schedules” (Financial Dictionary, 2011). Although there are many benefits of the IFRS depreciation method, there are also numerous challenges that Clark Corporation will face from the gaps between current accounting practices and the new reporting system. One internal control challenge in migrating from the U.S. GAAP depreciation method to the IFRS depreciation method is the incompatibility between the systems. There are various internal controls in the U.S. GAAP reporting system that must be altered for the new reporting system, IFRS. First, the preventative controls in the U.S. GAAP system are effective to restrict the user from performing unauthorized actions but it may not be effective in the IFRS information system. For instance, due to the incompatibility between the systems, this control may block an account that is necessary to access...
Words: 1527 - Pages: 7
