1. TO: BurleyDesigns
FROM: TylerGallagher
DATE: May 5, 2012
SUBJECT: DepreciationMemo
Thismemois showingthree differentkindsof depreciationforthe newlyacquiredbicycle
manufacturingmachine.Iwill showthe straight-linedepreciation, units-of-productiondepreciation,and
the double-decliningdepreciationbyshowingcalculationsforeach. Iwill give anadvantage anda
disadvantage oreachtype of depreciation. Finally Iwillmake arecommendationonwhichdepreciation
to use.
Straight-Line:
Year Depreciable
Cost
Depreciation
Rate
Depreciation
Expense
Accumulated
Depreciation
Book Value
0 - - $ 18,250
1 $ 16,250 14.28% $ 2,321.43 $ 2,321.43 15,928.57
2 16,250 14.28 2,321.43 4,642.86 13,607.14
3 16,250 14.28 2,321.43 6,964.29 11,285.71
4 16,250 14.28 2,321.43 9,285.72 8,964.28
5 16,250 14.28 2,321.43 11,607.15 6642.85
6 16,250 14.28 2,321.43 13,928.58 4,321.42
7 16,250 14.28 2,321.43 16,250.01 2,000
I determinedthe straightline depreciationschedule byfirst findingthe depreciationexpense.I
foundthisbyusingthe equationsbelow.
$ 18,250-$ 2000=$ 16,250
$ 16,250/ 7 years =$ 2321.43/year
I thenused$2,321.43 as the depreciationexpense.Itookthe beginningbookvalue of $18,250
and subtracted$2,321.43 everyyearafterthe firstyear forsevenyears.AftersevenyearsIhada new
bookvalue forthe machine at $1999.99.
An advantage of usingstraight-line depreciationisthatitis verysimple.Itisonlyatwo-step
process. Anotheradvantage itisconsistent. A disadvantage isthatyouare assumingthe machine will
performexactlythe same eachyearwhichisusuallynottrue.Thisdoesnot take intoaccount anyrepair
costs that mayoccur.
2. Units-of-Production:
Year # of Units
Depreciation
per unit
Depreciation
Expense
Accumulated
Depreciation
Book Value
0 - - - - $ 18,250
1 13,500 $ 0.1161 $ 1,567.35 $ 1,567.35 16,682.65
2 14,250 0.1161 1,654.43 3,221.78 15,028.22
3 15,000 0.1161 1,741.50 4963.28 13,286.72
4 16,200 0.1161 1,880.82 6,844.10 11,405.90
5 17,000 0.1161 1,973.70 8,817.80 9,432.20
6 18,000 0.1161 2,089.80 10,907.60 7,342.40
7 19,100 0.1161 2,217.51 13,125.11 5,124.89
I determinedthe unitsof productiondepreciationbyfirstfindingthe depreciationexpense.Next
stepwas to findthe total unitsof production;Ididthisby usingthe estimate unitsandmultiplyingthat
numberbyseven. DoingthatcalculationIcame up with140,000 units. Ithentookthe depreciation
expense anddivideditbythe total numberof units.
$ 18,250-$2000= $ 16,250
$ 16,250/140,000 units = $ 0.1161 per unit
I foundthe depreciationperunitwhichis $0.1161 or approximatelytwelvecents.Itookthe
numberof unitsanticipatedeach yearandmultipliedthatby $ 0.1161 to geta yearlydepreciation
expense.The final value of the machine is$5,124.89.
An advantage of units-of-productiondepreciationis thatittakesusage of the machine into
account. Itis more accurate than straight-line depreciation. A disadvantage of thismethodisthat it
requiresmore calculations, oftenmore complex thanthe straight-line depreciationmethod. Another
disadvantage isthatitis notconsistent,because of production.
3. Double-Declining-Balance:
Year Beginning Value
Depreciation
Rate
Depreciation
Expense
Accumulated
Depreciation
Ending Book
Value
0 - - - - $ 18,250
1 $ 18,250 28.57% $ 5214.29 $ 5214.29 13,035.71
2 13,035.71 28.57 3,724.56 8,938.78 9,311.22
3 9,311.22 28.57 2,660.33 11,599.13 6,650.87
4 6,650.87 28.57 1,900.25 13,499.38 4,750.62
5 4,750.62 28.57 1,357.32 14,856.70 3,393.30
6 3,393.30 28.57 969.51 15,826.21 2,423.79
7 2,423.79 28.57 * 423.79 16,250.00 2,000.00
* Year 7 DepreciationExpense isequal to$2,423.79 – $423.79 to get$2000. You cannot go
undersalvage value forthe bike manufacturingmachine.
To findthe double decliningbalance Ifirstfoundthe depreciationrate bytaking100% dividingit
by the useful lifewhichisseven.Ithentookthat numberandmultiplieditbytwotoget the double-
decliningbalance rate.
100% / 7 years= 14.28%/yr
14.28% x 2 = 28.57%/yr
I tookthe beginningbalance of $18,250 and multiplieditby28.57% to geta yearlydepreciation
expense. Ithentookthe beginningbookvalue andsubtractedthe yearlydepreciationexpensetogeta
newendingbookvalue.Irepeated thisstepuntilIgotto the pointwhere the endingbookvalue would
be underthe salvage value. ThisyearI tookthe differencebetween$2,423.79 and$ 2,000 and made
that numbermydepreciationexpense forthatyear.
An advantage todeclining-balance methodis letsyoudeductfromyourtaxesa largeramountin
the firstfew yearsof the assetsuseful life.Youwouldsave ontaxesthe firstfew years. A disadvantage
to thismethodisthat ittakesthe mostnumberof calculations of all the typesof depreciationmethods,
whichincreaseschancesforerror. It isnot a consistentmethod.
Recommendation:
I wouldrecommendusingthe Units-of-Productionmethod becauseithasthe mostaccurate
type of depreciationbecause ittakesthe machinesusage intoaccount.Alsoatthe endof 7 years the
value is$ 5,124.89, whichis the highestamountoutof the three typesof depreciation.