Question

Identify the two types of depreciation used in the Formula/Cost approach and give an example for each:

a) Straight-line depreciation
b) Declining balance depreciation
Example: For straight-line depreciation, consider a building depreciated evenly over 20 years. For declining balance, a computer may depreciate more rapidly initially.

Answer 1

The two types of depreciation methods are straight-line, which evenly spreads out the depreciation over the asset's life, and declining balance, which accelerates depreciation in the asset's early years.

Step-by-step explanation:

The two types of depreciation used in the Formula/Cost approach are straight-line depreciation and declining balance depreciation.

Straight-line depreciation is a method where the value of an asset is reduced evenly over its useful life. For example, if a building worth $100,000 is depreciated over 20 years, it would depreciate by $5,000 each year ($100,000/20 years).

Declining balance depreciation is a method that accelerates the depreciation rate in the earlier years of the asset's life. As an example, for a computer worth $1,000 with a depreciation rate of 30% annually on a declining balance, the first year's depreciation expense would be $300 ($1,000 * 30%), the second year's would be based on the remaining book value of $700, and so on.