Question

Explain the difference between the straight line, double declining balance and the unit-of-production depreciation methods. Document the method used for each of the three companies (Pepsi,Coca-Cola and Dr Pepper Snapple).

Answer 1

Depreciation Method:

Depreciation expense is used in accounting to allocate the cost of a tangible asset over its useful life. In other words, it is the reduction in the value of an asset that occurs over time due to usage, wear and tear, or obsolescence.

Straight-Line Depreciation Method:

This is the most commonly used method to calculate depreciation. It is also known as fixed instalment method. Under this method, an equal amount is charged for depreciation of every fixed asset in each of the accounting periods. This uniform amount is charged until the asset gets reduced to nil or its salvage value at the end of its estimated useful life.

Annual Depreciation Expense = (Cost of an asset – Salvage Value)/Useful life of an asset

Where,

• Cost of the asset is purchase price or historical cost
• Salvage value is value of the asset remaining after its useful life
• Useful life of the asset is the number of years for which an asset is expected to be used by the business

Double Declinig Balance Method:

This method is also known as reducing balance method, written down value method or declining balance method. A fixed percentage of depreciation is charged in each accounting period to the net balance of the fixed asset under this method. This net balance is nothing but the value of asset that remains after deducting accumulated depreciation.

Depreciation Expense = (Book value of asset at beginning of the year x Rate of Depreciation)/100

Units of Production Method:

The units-of-production depreciation method depreciates assets based on the total number of hours used or the total number of units to be produced by using the asset, over its useful life.

Depreciation Expense = (Number of units produced / Life in number of units) x (Cost – Salvage value)

Method of Depreciation followed by

Pepsi Company - Straight Line Method

Coco-Cola - Straight Line Method

Dr Pepper Snapple - Straight Line Method