Monday, March 8, 2010

Different Business Depreciation Methods

What is the straight-line depreciation method, units of production depreciation method, and double declining balance method if an investor purchase a business for \$55 million dollars and the business will remain useful for 10 years (1,000,000 miles). At the end, the business will have residual value of \$5 million.

Additional facts:

What will happen if 80,000 miles are put on the ship the first year and 115,000 miles the second year.

Using the above three methods, what is the business depreciation for the first and second years.

Accounting Answer:

If the straight line method is used, first determine the useful life and determine a rate in this case, which equals 1/10 of the entire useful life.

If the units of production method is used, this requires you amortize the current value by the proportion utilized \$50,000,000/\$ 1,000,000*usage

If the the double declining method of depreciation is used, this means that the accountant applies the rate chosen to declining methodology, but double the rate used each year so in each year you will charge 20% of the written down balance on a depreciation schedule.

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