Purchase Solution

# How does a firm select the depreciation method

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Atwater Manufacturing Company purchased a new machine especially built to perform one particular function on the assembly line. A difference of opinion has arisen as to the method of depreciation to be used in connection with this machine. Three methods are now being considered.

(a) The straight-line method
(b) The productive-output method
(c) The sum-of-the-year's digits method

List separately the arguments for and against each of the proposed methods from both the theoretical and practical viewpoints.

##### Solution Summary

This discussion gives practical and theoretical reasons for selecting a particular depreciation method. Pros and cons are presented for each method (in bullets).

##### Solution Preview

I presume you have a textbook that lists some reasons but here are some more to think about:

SL:
Practical: same amount each time so easy to budget and understand
Theory: asset may be used evenly over time or life may be time dependent so "using up over time" reflects reality of use and depletion of resource

PO:
Theory: depreciation matches actual activity and so is best ...

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