What dothinkIr the reasonwhyyoutheremany depreci ationerty.ecep tedand equip ment?method gene rally accep tedinaccoun finafor$0p $ lant

Answered: What do think Ir the reason why you…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

What do
think
Ir the reason
why
you
there
many depreci ation
erty.
ecep ted
and equip ment?
method gene rally accep ted
in
accoun fina
for
$0p $ lant

Expert Solution

Step 1: Introduction

Property, plant and equipment (PPE) refers to the non current assets of a company, having a useful economic life of more than a year. This means that the future economic benefits to be received spans over a period of more than a year. There are majorly four most common methods of depreciation in use:-

Straight line method
Double declining balance
Units of production
Sum of years digits

Step 2: Part 1

The main reasons that can be attributed to the acceptability of the 4 different methods of depreciation under GAAP are as follows:-

Various sectors and industries have different valuation approaches which are majorly dependent on the dynamic changing scenario and technological advancements. As a result, such organizations would find it more advantageous to depreciate their PPE at a faster or a double rate. Hence, the need for the introduction of double declining balance method. Moreover, this method also widely used by the companies for tax purposes.
In the manufacturing sector, the estimated life of a machine used in the production process is mainly dependent on its production capacity in terms of number of units. Therefore, it is much more relevant to measure the value of an asset and its annual depreciation using the units of production method rather than using the estimated useful life of the asset.
The sum of years digit method is a form of an accelerated depreciation in which during the initial years, an asset is depreciated with the highest amount and it declines over the useful life of the asset in such a manner that the later years have the least amount of depreciation allocated. This method reflects the fact that with age, the benefit of using the asset will also decline. Hence, this method is most frequently applied to an intangible assets in the banking sectors for eg: acquired depositor relationships, since their benefits reduce with age.
Whereas, all other 3 methods of depreciation may be used specifically to an industry or an asset, the straight line method is the most common form and is usually used in cases where there is no specific consumption pattern linked to the asset.

Therefore, from the above explanations, it is clear that these methods of depreciation not only vary from one industry to another but is also dependent on the voluntary choice of adopting a method best suited for a company.

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