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Depreciation and Cost Depletion

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List (a) the similarities and (b) the differences in the accounting treatments of depreciation and cost depletion.

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Solution Summary

This solution provides a detailed explanation of the differences between depreciation and depletion. All necessary examples and calculations are given for each method with numerical statements.

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Detailed explanation of difference between Depreciation and Depletion is provided in a separate file in M.S. word format attached herewith. Necessary examples and calculations are given for each method with numerical statements.

Comparison of Depreciation and Depletion

1 Depreciation

Depreciation is a mean of cost allocation. It involves allocation of capital cost to Depreciation expenses as per matching principles. Mainly there are three methods of charging depreciation eg (1) Activity based method (2) Straight line method and (3) Declining balance method. For example cost of the asset is $1000000, estimated life is 60000 hours and residual or scrap value at the end of five years is $100000.Assume that actual hours used in the current year are 8000 hours..

Cost 10000000 Less Residual value 100000, Amount to be depreciated $900000

Depreciation per hour = 900000/60000 hours = $15 per hour

(1) Depreciation for the current year = 8000X15 = 120000

(2)In straight line method Depreciation charge comes to ...

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