Units-of-Production Method

1. Explain the justification for accelerated methods of depreciation.

2. Compute depreciation expense using the double-declining balance method.

3. Realize that the overall impact on net income is not affected by a particular cost allocation pattern.

4. Describe the units-of-production method, including its advantages and disadvantages.

5. Compute depletion expense for a wasting asset such as an oil well or a forest of trees.

6. Explain the reason that depletion amounts are not directly recorded as an expense.

Question: Straight-line depreciation certainly qualifies as systematic and rational. The same amount of cost

is assigned to expense during each period of use. Because no specific method is required by U.S. GAAP, do

companies ever use alternative approaches to create other allocation patterns for depreciation? If so, how are

these additional methods justified?

Answer: The most common alternative to the straight-line method is accelerated depreciation, which records a

larger expense in the initial years of an asset’s service. The primary rationale for this pattern is that property and

equipment often produce higher revenues earlier in their lives because they are newer. The matching principle

would suggest that recognizing more depreciation in these periods is appropriate to better align the expense with

the revenues earned.