6th-Lesson #05 - Handout Notes

422 the diminishing balance method produces a

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Unformatted text preview: alculate the portion of the year. 4.2.2 The diminishing-balance method produces a decreasing annual depreciation expense over the useful life of the asset. Annual depreciation expense is calculated by multiplying the carrying amount at the beginning of the year by the constant straight-line depreciation rate. This rate is often increased by a diminishing-balance multiplier (e.g., 1, 1 ½, 2, 3). The method is compatible with the matching principle in that the higher depreciation expense in early years is matched with the higher benefits received in these years. The formula for computing depreciation expense is: Carrying Amount (at beginning of year) X Straight-line rate (X diminishing balance multiplier, in any) = Depreciation Expense To illustrate the computation, assume that Benoit Company uses a diminishing-balance rate that is double the straight-line rate of 25%. Depreciation in the first year is \$5,500 (\$11,000 X 50%). 4.2.2.1 If an asset is acquired part-way through the year, the depreciation is prorated for the time the asset was in use during the year. The diminishing-balance method is required for income tax purposes. In addition, Canada Revenue Agency specifies the straight-line rate to be used for various classes of assets. The calculation of depreciation expense, called capital cost allowance (CCA), is computed on a group basis and is subject to a number of rules and restrictions. 4.2.3 Under the units-of-production method, instead of expressing the life as a time period, useful life is expressed in terms of the total units of production or activity expected from the asset. Annual depreciation expense is calculated by multiplying depreciation cost per unit by the units of production during the year. This method is not nearly as popular as the straight-line method because it is often difficult to make a reasonable estimate of total production. BCIT – FMGT 1152 – Accounting for the Manager 5 of 8 The formula for computing depreciation expense is: Depreciable Cost (cost - residual value) = Depreciation Cost per Unit Total Units of Production Depreciation Cost Per Unit X Units of Production During Year =Depreciation Expense To illustrate the computation, assume that Benoit Company expects to drive the truck purchased in 4.2.1 for 100,000 kilometers and that 30,000 kilometers are driven in the first year. Depreciation for the first year is \$3,000. \$10, 000 ÷ 100, 000 = \$. 10 per km. x 30,000 = \$3,000 4.2.3.1 If an asset is acquired part-way through the year, the depreciation is unaffected, since the units of production already reflect the time t...
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This document was uploaded on 04/07/2014.

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