Page 76 - Account for Ag - 2019

12-4 Accounting for Agriculture CH 12]

construction equipment for a month and then not use it again for many months. For such an asset, since use and
contribution to revenue may not be uniform from period to period, the straight-line method may not be fair. For
such an asset the units of production method often more fairly allocates depreciation.
When the units of production method is used in allocating depreciation, the cost of an asset's fund of
usefulness is divided by the estimated units of product it will produce during its entire service life. This division
gives depreciation per unit of product. Then the amount the asset depreciates in any one accounting period is
determined by multiplying the units of product produced in that period by depreciation per unit. Units of product
may be expressed as units of product or in any other unit of measure such as hours of use or miles of use. For
example, a delivery truck costing $4,800 is estimated to have an $800 salvage value. If it is also estimated that
during the truck's service life it will be driven 50,000 miles, the depreciation per mile, or the depreciation per unit
of product, is $0.08. This is calculated as follows:

Cost - Salvage Value Depreciation per
= Unit of Product
Estimated Units of
Production

or

$4,800 - $800
= $0.08
50,000 miles

If these estimates are correct, and the truck is driven 20,000 miles during its first year, the depreciation for the
first year is $1,600. This is 20,000 miles at $0.08 per mile. If the truck is driven 15,000 miles in the second year,
the depreciation for the second year is 15,000 times $0.08, or $1,200.
Declining Balance Method. The Revenue Act of 1954 authorized the use of calculating depreciation at a rate
that takes a higher depreciation charge during the early years of a fixed asset's life. The declining balance method
is one of these. Under the declining balance method, depreciation of up to twice the straight-line rate, without
considering salvage value, may be applied each year to the declining book value of the asset. However under this
method no more than the total allowed depreciation of cost minus salvage value may be taken.
If this method is followed, one may elect to take 200%, 150%, 125%, or 100% depreciation. Which percent
elected depends upon the type of asset, life of the asset and whether the asset is new or used. You should refer to
the IRS codes and publications for clarification. The method of calculating is predicated on (1)calculating the
depreciation factor, which becomes a constant for years depreciation, (2)calculating the years depreciation, and
(3) at the end of each year in the asset's life, applying this rate to the asset's remaining book value. (The book
value of a fixed asset is its cost less accumulated deprecation; it is the value shown for the asset on the books.)
To illustrate, assume that you have purchased a new wagon for $10,000. It is determined to have a useful life
of 5 years and a salvage value of $500. (Step 1) Calculate the total allowable depreciation, which is ($10,000
- $500 =) $9,500. (Step 2) Calculate the declining balance factor (df) which is 1 year / asset life times the
declining balance percent, as applied here it is equals ( 1/5 x 2.00 =) 0.40 (or 40%). The depreciation expense for
the first year would be (0.40 x $10,000 =) $4,000; for the second year the depreciation would be (0.40 x $ 6,000
=) $2,400; and so on. This accelerated method may be applied to assets that have a useful life of three or more
years. The depreciation is calculated down to the salvage value of the asset, though it begins with asset's cost or
beginning book value would be as follows for the life of the asset:

Annual
Depreciation Remaining
Year Calculation Expense Book Value
1 ……. 0.40 x $10,000 $4,000.00 $6,000.00
2 ……. 0.40 x $ 6,000 $2,400.00 $3,600.00
3 ……. 0.40 x $ 3,600 $1,440.00 $2,160.00
4 ……. 0.40 x $ 2,160 $ 864.00 $1,296.00

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