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Methods of Depreciation - Choosing the Correct Method

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There are various methods of asset depreciation. The methods of depreciation include the straight-line method, units-of-production method, and double-declining balance method.

Consider the methods of depreciation and respond to the following:
What are the various points or factors you would consider while choosing a method of depreciation for plant and equipment of an electricity company? Explain with examples.

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The most common forms of depreciation are listed. The straight-line method is not used commonly. It is used when required by the IRS as the depreciation method. Real estate must be depreciated under straight line because it is considered real property. The units of production method is most often used by manufacturing facilities when depreciating equipment. This is because the machine loses value the more it is used. The double declining balance method is used for an asset that has a ...

Solution Summary

This solution discusses methods of depreciation and uses the example of an electric company. Additional resources are provided for student expansion.

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1. Discuss why you feel that GAAP allows so many alternative methods for valuing inventories and computing depreciation.

2. Identify the factors that you, as a manager, would consider in chosing among the alternative inventory and depreciation methods allowed by GAAP.

3. Discuss what you feel might happen if all the firme were forced to use the same method. For eg. assume that instead of allowing for several alternative inventory and depreciation methods, GAAP simply required all the firms to use the straight line depreciation method and FIFO inventory method. Do you think that by requiring all the firms to use the same methods, the usefulness of financial statements would be increased or decreased? Explain.

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