Question

Based on the information given below, what method of depreciation would you suggest each of the three companies to use and explain your reasoning?

(Provide a short paragraph for each scenario.)

1. Patel Company is an International company that manufactures sneakers. They use many heavy-duty equipment and also employ robots for the repetitive functions to make the sneakers.
2. Lopez Associates is a medical consulting company that sells software to doctors and other health professionals. They have salesmen who travel long distances in the company’s automobiles.
3. Dole Company is a newly formed company that is in a very large industrial park and has a large number of office furniture for their employees and wants to employ a method that will accelerate the amount of expense that they can take each year.

Answer 1

• Patel Company ; Unit of production method

Here , equal depreciation expense rates are assigned to each unit produced . Here , the depreciation calculation is based on output capability of the asset rather than the number of its useful years and so it is an effective and fair method to calculate depreciation for manufacturing company assets such as heavy duty equipments and robots used for the production process.

the formula is

Total Depreciation Expense = Per Unit Depreciation * Units Produced

Per unit Depreciation = (Asset cost – Salvage value) / Total Estimated Production Unit

• Lopez associate :The Modified Asset Cost Recovery System (MACRS)

MACRS is a common way to calculate depreciation for automobiles.

MACRS depreciation allows the capitalized cost of the assets to be recovered over a specified period via annual deductions . This method is available only if more than 50% of the total miles driven are for business purposes. MACRS is calculated after taking the Section 179 deduction.In this method,  high depreciation amounts are assigned in earlier years of the automobiles . Depreciating a vehicle through MACRS can be  financially advantageous if the business want to lower fiscal liabilities in the earlier years of its useful life .

• Dole Company : Double Declining Balance (DDB)

  This is an accelerated depreciation method. This method is useful and fair as Dole company wishes to maximise the expenses it can take each year. this method counts depreciation expense twice as much as the book value of the asset every year.

  The formula is:

  Depreciation = 2 * Straight line depreciation percent * book value at the beginning of the accounting period

  Book value = Cost of the asset – accumulated depreciation.Accumulated depreciation is the total depreciation of the fixed asset accumulated up to a specified time.