Depreciation of Fixed Assets: The Straight Line

Depreciation of Fixed Assets: The Straight Line and Double Declining Methods

A tractor acquired on January 4 of the current year at a cost of $100,000 has an estimated life of 10 years. Assuming that it has a residual value of $10,000, determine the depreciation expense in the current year using the straight-line method and the double-declining method.

Determine the Depreciation Expense for the current year using the a) Straight line method and b) Double declining balance method. Show your solution.

The matching principle of accounting requires that for every period of time the owners enjoy the use of an asset, the costs incurred should be allocated as expenses (Albrecht et al., 2008). This is because as fixed assets, with the exception of land, are used, they are less able to provide the same services as time goes by. Depreciation is one such allocation process, and it is the decrease in the value of a fixed asset due to continuous use. It may be caused by wear and tear brought about by overuse or extreme weather, or caused by obsolescence, which occurs when the asset is no longer of use (Warren, Reeve and Duchac, 2013). Among the various methods of depreciation, the straight line and the double declining method are the most popular.

a) The straight line method

The straight depreciation method charges the cost of a particular asset uniformly over the useful life of a given asset. Using this method, owners will pay the same amount in depreciation expenses for every year they use the asset (Warren, Reeve and Duchac, 2013). The formula for calculating an assets annual depreciation using this method is as follows:

Annual Depreciation = (Cost -- Residual Value) / the useful life of the asset.

The tractor in the example above has an initial cost of $100,000, an estimated useful life of 5 years and a salvage value of $10,000.

Therefore, the depreciation for the current year is calculated as:

($100,000-$10,000)/10 years= $9,000

For each year they use the tractor, they will be paying a depreciation expense of $9,000.

b) The double declining method

As opposed to the straight line method, the double declining method, also known as the accelerated depreciation method, involves a higher depreciation charge (Albrecht et al., 2008). Over the useful life of the asset, owners have to pay a declining periodic expense for that particular asset. This method involves multiplication of the book value of the asset with a fixed rate. It requires three steps in calculation:

Step 1: The useful life of the asset is used to determine the straight line percentage

Step 2: The straight line percentage is doubled to obtain the double declining balance rate

Step 3: The book value of the asset is multiplied by the double declining balance rate.

In the above example, first the straight line percentage is determined:

100/10 = 10%

The straight line percentage is then doubled.