Accelerated depreciation

Accelerated depreciation technique encompasses various methods of depreciation under which depreciation expense gradually decreases over the useful life of PPE. Higher depreciation expense is charged in initial years whereas lesser depreciation expense is charged in later years of the useful life of PPE.

Some assets are equally useful in their initial and later years, and for such assets, straight-line method of depreciation is suitable. However, generally assets are relatively more useful and efficient when they are new, and these assets tend to lose their usefulness and efficiency with age. For example, a computer is efficient in its initial stages, however, it becomes less efficient due to wear and tear due to usage. Furthermore, it tends to become relatively obsolete as it ages due to technological advancements in the market. So, the rationale of accelerated depreciation method is to match the greater economic benefits of an asset in its initial years with greater depreciation expense, and lesser economic benefits in its later years with lesser depreciation expense.

Two commonly used accelerated depreciation methods are explained below.

Double-declining balance method

Under this method, depreciation rate is determined by applying the accelerator factor of “2” to the straight-line depreciation rate i.e. 2 x 1/useful life of asset. By doing so, we are doubling the depreciation rate calculated by taking the reciprocal of useful life, hence the name double-declining balance method. This depreciation rate is applied to the current net book value of the asset to calculate depreciation expense.

Formula

Depreciation under double-declining balance method can be calculated using the following formula:

Depreciation expense = Net book value x [ 2 x (1/useful life)]

Let’s take a look at the following example to clarify double-declining balance method of depreciation.

Example

On 1 January 20×1, XYZ Company purchased a refrigerator manufacturing plant costing $550,000 whose useful life is estimated to be 5 years. The plant’s salvage value or residual value is estimated to be $50,000. Let’s see how depreciation expense is calculated using double-declining balance method.

Straight-line depreciation rate can be calculated by taking the reciprocal of the asset’s useful life. In this case, 1/5 gives us the depreciation rate of 20% per annum. This rate is doubled by multiplying it with 2, resulting in the depreciation rate of 40%. Let’s calculate depreciation expense using the depreciation rate of 40% per annum.

YearOpening NBVDepAcc depClosing NBV
20×1550,000220,000220,000330,000
20×2330,000132,000352,000198,000
20×3198,00079,200431,200118,800
20×4118,80047,520478,72071,280
20×571,28021,280500,00050,000
20×650,000500,00050,000

It must be noted that in year 20×5, depreciation would have been $28,512 at the rate of 40%, however, as this would have taken the carrying amount below the salvage value of asset, therefore depreciation is restricted to $21,280.

Sum of the years’ digits depreciation method

This is also an accelerated depreciation method under which depreciation expense gradually decreases over the useful life of PPE.

Formula

Depreciation under sum of the years’ digits depreciation method can be calculated using the following formula:

Depreciation expense = Depreciable amount x [Remaining useful life/sum of the years’ digits]

Let’s take a look at the following example to clarify Sum of the years’ digits depreciation method.

Example

On 1 January 20×1, XYZ Company purchased a refrigerator manufacturing plant costing $550,000 whose useful life is estimated to be 5 years. The plant’s salvage value or residual value is estimated to be $50,000. Let’s see how depreciation expense is calculated using sum of the years’ digits depreciation method.

In this example, sum of the years’ digits would be 15 (1+2+3+4+5). To calculate the first year’s depreciation, remaining useful life will be 5 years, so 5/15 will be multiplied with the depreciable amount. In second year, remaining useful life will be 4 years, so 4/15 will be multiplied with the depreciable amount. Similarly, depreciation for all years will be calculated.

Following table shows depreciation expense of the asset over its useful life.

YearOpening NBVDepAcc depClosing NBV
20×1550,000166,667166,667383,333
20×2383,333133,333300,000250,000
20×3250,000100,000400,000150,000
20×4150,00066,667466,66783,333
20×583,33333,333500,00050,000
20×650,000500,00050,000