The calculation of the straight line method of depreciation is by taking the cost of the item minus its salvage value then dividing that figure by the expected year’s life cycle of the item. This is a non complex calculation and it reduces net income and the equal amounts of depreciation are deducted from every life cycle year of the item. The double declining balance method of depreciation is calculated at double or 200% for the straight line rate. Let’s say the straight line rate is 20%, then using the double declining balance method then the rate is 40%.
The amount is multiplied by the book value of the item at the start if each period and also this method deduct higher costs in the product’s early life that decreases net income in the beginning. The units-of -output method of depreciation is calculated on the item production rather than time. The item cost minus the salvage value then is multiplied by total hour’s usage during the period and then you will take figure divide it by the total life cycle expectancy hours.
Utilization of this method is more beneficial to organizations that costs are the results of production. One fact you must keep in mind is when there low production output then net income reduction is low and vice versa when there is high production outputs. The sum-of-the-year’s-digits method of depreciation calculation is configured by using the fraction formula. The fraction formula is computed by using the number of years of the item life cycle use as the numerator and the total years as the denominator.
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If the item life cycle is 5 years then the numerator in year one of depreciation will be 5 and 15(5+4+3+2+1) as the denominator the fraction would be 5/15. Which this is fraction is multiplied by the depreciable base of the item to conclude the year one depreciation figure. All the proceeding years will follow the same process from year two to five and until the item total life cycle is complete.
This similar to the double declining method in the aspect that net income is reduced in the years of the life cycle instead of the latter. I recommend that the most beneficial depreciation method for Fan Company A’s equipment is the double declining balance method. This method gives produces a higher percentage of return of costs in the early years of the item and it still lowers net income but also in the later year help offset repair costs for the item. .