Answer
Major factors to be considered in determining the amount of depreciation to be used include:
i. The decline in the service potential of the asset.
ii. Pragmatic reasons i.e., accelerated methods for tax purposes and straight-line for book purposes.
iii. Orientation to eliminate some recordkeeping costs.
iv. Tax policies involved.
Work Step by Step
If the service potential decline is faster in the earlier years, an accelerated method would seem to be more desirable. On the other hand, if the decline is more uniform, perhaps a straight-line approach should be used. Many firms adopt depreciation methods for more pragmatic reasons. Some companies use accelerated methods for tax purposes but straight-line for book purposes because a higher net income figure is shown on the books in the earlier years, but a lower tax is paid to the government. Others attempt to use the same method for tax and accounting purposes because it eliminates some recordkeeping costs. Moreover, tax policy sometimes also plays a role.
