GB518 Unit 6 Depreciation Methods Exercise Example

Three Ways to Depreciate a $400,000 Press: A Unit 6 Exercise on What the Method Does to Earnings

[Student Name]

Purdue University Global

GB518: Financial Accounting Principles and Analysis

Unit 6 Depreciation Methods Exercise

[Instructor Name]

[Date]

The printing company, its press and every figure are composite and illustrative; the standards and sources cited are real.

The Asset

Brightwell Print & Mail bought a digital production press for $380,000, plus $6,500 of freight and $13,500 of installation and calibration, so the capitalized cost is $400,000. Costs needed to bring an asset to working condition are part of its cost (Kieso et al., 2022). Estimated salvage value after five years is $40,000, leaving $360,000 to depreciate. Projected impressions are 2.2 million in year one, 2.6 million in year two, 2.4 million in year three, 2.0 million in year four and 1.8 million in year five, 11.0 million in all.

Straight-Line Schedule

Annual depreciation is $360,000 divided by five, or $72,000. Book value falls from $400,000 to $328,000, $256,000, $184,000, $112,000 and finally $40,000.

Double-Declining-Balance Schedule

The straight-line rate of 20 percent is doubled to 40 percent and applied to beginning book value. Year one: $160,000, ending book value $240,000. Year two: $96,000, to $144,000. Year three: $57,600, to $86,400. Year four: $34,560, to $51,840. In year five, 40 percent would be $20,736, but the press may not be carried below its $40,000 salvage value, so the charge stops at $11,840, ending at exactly $40,000. Declining balance never depreciates an asset below its salvage value.

Units-of-Activity Schedule

The rate is $360,000 divided by 11.0 million impressions, about $0.0327 per impression. Depreciation is $72,000 in year one, $85,091 in year two, $78,545 in year three, $65,455 in year four and $58,909 in year five. Total depreciation is $360,000 under all three methods.

Effect on Net Income and Return on Assets

Assume operating profit before depreciation of $210,000 a year, a tax rate of 25 percent and other assets of $1.2 million. Return on assets is net income divided by total assets at year end.

Year one. Net income: straight-line $103,500; declining balance $37,500; units $103,500. Return on assets: 6.8 percent, 2.6 percent and 6.8 percent.

Year three. Net income: straight-line $103,500; declining balance $114,300; units $98,591. Return on assets: 7.5 percent, 8.9 percent and 7.2 percent.

Year five. Net income: straight-line $103,500; declining balance $148,620; units $113,318. Return on assets: 8.3 percent, 12.0 percent and 9.1 percent.

A line chart of book value shows declining balance falling steeply in the first two years, straight-line falling evenly and units of activity tracking the impression forecast.

The press produces the same impressions under every method, yet first-year net income ranges from $37,500 to $103,500 depending only on how its cost is spread.

Why the Methods Converge

Over five years, every method charges the same $360,000 and ends at the same $40,000 book value, so total net income across the five years is identical. What changes is timing. Declining balance moves expense into the early years, when the press is new, and leaves the later years looking more profitable. Straight-line spreads it evenly. Units of activity follows the impression forecast, peaking in year two when volume is highest. A reader looking at one year in isolation would draw a different conclusion under each method, but a reader looking at the five years together would see the same total cost.

Why the Estimates Matter

All three methods rest on estimates: a five-year life, a $40,000 salvage value and, for units of activity, an impression forecast. If the press lasted seven years instead of five, straight-line depreciation would fall to about $51,400 a year and first-year net income would rise by about $15,400. Managers should review these estimates each year and change them prospectively if they no longer fit.

What a Board and a Lender Would Notice

A board judging the press's first year under declining balance would see return on assets of 2.6 percent and might question the investment, although nothing about the press's performance would differ. A lender with an earnings covenant would see the same low figure. The Libby, Libby and Hodge text points out that depreciation choices can make companies' earnings hard to compare and that analysts read the accounting policy notes for this reason (Libby et al., 2023).

Recommendation

Brightwell should use units of activity. The press wears with use: its print heads, rollers and drum are rated by impressions, and the service contract is priced per thousand impressions. Matching depreciation to impressions charges each year with the cost of the capacity it actually used, which is the purpose of depreciation. Units of activity also gives management a cost per impression, about 3.3 cents, useful in pricing print jobs.

Tax depreciation follows separate rules. On the federal return, the press falls under MACRS, the tax system of fixed recovery periods and front-loaded rates, whatever method the financial statements use (Internal Revenue Service, 2025). Because the two schedules differ each year, the accountant will carry a deferred tax balance until they converge.

References

Internal Revenue Service. (2025). How to depreciate property (Publication 946). https://www.irs.gov/publications/p946

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2022). Intermediate accounting (18th ed.). Wiley.

Libby, R., Libby, P. A., & Hodge, F. (2023). Financial accounting (11th ed.). McGraw Hill.