The methods of calculating depreciation can be summarized into four. They include straight-line depreciation, percent declining balance depreciation, sum-of-the-years digit method, and group depreciation (Cooke, 2004).
Straight-line depreciation;
In this method, the cost of the machine value less salvage value is divided by the total number of years of its useful life. This method claims that the depreciation expense is equal for every year of the machine’s useful life (Del Giudice et. al., 2016).
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Percent declining balance depreciation;
In this method, Depreciation is calculated by multiplying any percentage (above 100%) over 100 by the resulting value when the cost is divided by the useful life. There are several types of percent methods depending on the percentage used. For instance, for a 200 percent declining method, 200% is divided by 100% to 2 (double) then multiplied by the value from the total cost divide by its useful life (Cooke, 2004).
Sum-of-the-years digit method;
In this method, the remaining useful life of the machine is divided by the total number of years then multiplied by the cost less salvage value (Del Giudice et. al., 2016).
Group Depreciation;
In this depreciation method, various equipment is grouped together, and then depreciation is calculated on the group as if they were one (Del Giudice et. al., 2016).
Considering the depreciation method used by Spouse House Company to calculate depreciation of the automatic window machine, the depreciation is the same every year (Cooke, 2004). This depreciation method represents the straight-line depreciation. The computation used is as follows: the machine's cost less salvage value divided by the number of its useful life.
Spouse House Company can decide to use the 200 percent (double) declining balance depreciation when reporting to a different audience. For instance, for the automatic window machine of which the original cost is $55,000 and the useful life is 5years, the company can use the following computation to find the depreciation expense.
Annual depreciation expense = Total cost/useful life x 200/100
55,000/5 x 2 = $22,000
Ending book value at the end of the second year book value = (Cost – 1st year depreciation expense)/useful life
(55,000-22,000)/5 = $6,600
References
Cooke, R. A. (2004). The McGraw-Hill 36-Hour course in finance for nonfinancial managers. McGraw-Hill.
Del Giudice, V., Manganelli, B., & De Paola, P. (2016, July). Depreciation methods for firm’s assets. In International Conference on Computational Science and Its Applications (pp. 214-227). Springer, Cham.
