declining-balance method

Examples of declining-balance method in the following topics:

• Methods of Depreciation

  • Some of the most common methods used to calculate depreciation are straight-line, units-of-production, sum-of-years digits, and double-declining balance, an accelerated depreciation method.
  • Sum-of-years' digits is a depreciation method that results in a more accelerated write-off than straight line, but less accelerated than that of the double-declining balance method.
  • The double-declining balance method is a type of accelerated depreciation method that calculates a higher depreciation charge in the first year of an asset's life and gradually decreases depreciation expense in subsequent years.
  • With double-declining-balance, double that rate to arrive at 40%.
  • The deduction for depreciation is computed under one of two methods (declining balance switched to straight line or only straight line ) at the election of the taxpayer.

• Impact of Depreciation Method

  • The choice of depreciation method can impact revenues on the income statement and assets on the balance sheet.
  • The four most common methods of depreciation that impact revenues and assets are: straight line, units of production, sum-of-years-digits, and double-declining balance.
  • Sum-of-years digits is a depreciation method that results in a more accelerated write off of the asset than straight line but less than double-declining balance method.
  • This method will reduce revenues and assets more rapidly than the straight-line method but not as rapidly as the double-declining method.
  • Double-declining balance is a type of accelerated depreciation method.

• Factors for Calculating Depreciation

  • Most companies use the straight-line method for financial reporting purposes, but they may also use different methods for different assets.
  • The following four methods allocate asset cost in a systematic and rational manner: straight line, units of production, sum-of-years-digits, and double-declining balance.
  • This amount is disclosed on the income statement and is part of the asset's accumulated depreciation on the balance sheet.
  • To calculate depreciation using the double-declining method, its possible to double the amount of depreciation expense under the straight-line method.
  • Next, apply the resulting double-declining rate to the declining book value of the asset (cost subtracted by accumulated depreciation).

• Limited-Life Impairment

  • Limited-life intangibles are amortized throughout the useful life of the intangible asset using either the units of activity or the straight-line method.
  • Intangible assets are amortized to reflect their consumption, expiry, obsolescence or other decline in value as a result of use or the passage of time, process which is similar to the deprecation process for tangible assets.
  • Limited-life intangibles are systemically amortized throughout the useful life of the intangible asset using either units of activity method or straight-line method.
  • When an intangible asset's impairment reverses and value is regained, the increase in value is recorded as a gain on the income statement and reduction to accumulated impairment loss on the balance sheet, up to the amount of impairment loss recorded in prior periods.
  • Increases in value in excess of prior impairment loss are debited directly to the asset and credited to a revaluation reserve account in the equity section of the balance sheet.

• Valuing Accounts Receivable

  • Business owners know that some customers who receive credit will never pay their account balances.
  • Companies use two methods to account for bad debts: the direct write-off method and the allowance method.
  • Before determining that an account balance is not collectible, a company generally makes several attempts to collect the debt from the customer.
  • Accounts receivable is a control account that must have the same balance as the combined balance of every individual account in the accounts receivable subsidiary ledger.
  • Differentiate between the direct write-off method and the allowance method of accounts receivable valuation

• Income Statement Formats

  • At the same time, other assets may decline in value and liabilities may increase.
  • Thus, the balance sheet has a direct relation with the income statement.
  • Some numbers depend on accounting methods used.

• Lower of Cost or Market

  • If the inventory has decreased in value below historical cost, then its carrying value is reduced and reported on the balance sheet.
  • Any loss resulting from the decline in the value of inventory is charged to cost of goods sold (COGS) if non-material, or loss on the reduction of inventory to LCM if material.
  • The basic assumption of the LCM method is that if the purchase price of an item has fallen, its selling price also has fallen or will fall.
  • Under the class method, a company applies LCM to the total cost and total market for each class of items compared.
  • Cost is primarily determined by either the average cost or the first-in, first-out method.

• Recognizing Notes Receivable

  • The ending balance on the trial balance sheet for accounts receivable is usually a debit.
  • Companies have two methods available to them for measuring the net value of accounts receivable, which is generally computed by subtracting the balance of an allowance account from the accounts receivable account.
  • The first method is the allowance method, which establishes a contra-asset account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable.
  • This second method is simpler than the allowance method in that it allows for one simple entry to reduce accounts receivable to its net realizable value.
  • Describe the difference between using the allowance method vs. the write off method when recording a note receivable

• Reporting Inventories

  • Inventory is an asset and its ending balance should be reported as a current asset on the balance sheet.
  • Companies must choose a method to track inventory.
  • Inventory is an asset and its ending balance should be reported as a current asset on the balance sheet.

• Impacts of Costing Methods on Financial Statements

  • The FIFO method assumes that the first unit in inventory is the first until sold.
  • So, the balance sheet has the cost of goods sold at $1 and the balance sheet retains the remaining inventory at $5.50.
  • Unfortunately, prices do tend to rise over the years, and the company's method costing method affects the valuation ratios.
  • During periods of inflation, the FIFO gives a more accurate value for ending inventory on the balance sheet.
  • Keep in mind deflation (falling prices) have an opposite effect on each method.