Memorandum
To: Board of Directors, Fan Company A
From: Wendy Ostrander
Date: [ 10/31/2013 ]
Re: Recommended Depreciation Method
Confidential
Before a decision is made on which depreciation method would best benefit Fan Company A , let’s take a brief look at four different methods that can be used to calculate depreciation:

* Straight line * Double declining balance * Units of output * Sum of the year’s digits

Using the straight line method, depreciation is calculated by subtracting the residual value of the asset from the purchase cost and dividing that by the expected useful life (in years) of the asset. This results in the same amount of depreciation each year. This method is simple to calculate and is one of the most common methods of depreciation. Straight line depreciation is often used when the benefit of the asset will remain constant over the assets useful life.

The double declining method of depreciation is often used when the asset will provide greater benefits in the early years versus the later years of its useful life. This method provides a more accurate matching of revenues with depreciation when this is the case. The double declining method does not take into account a residual value when calculating depreciation. The rate of depreciation is twice that of straight line depreciation and is calculated each year on the new book value of the asset.

The units of output method of depreciation is activity based. The service life of the asset is measured in some form of productivity. First a per unit measure of activity is determined. Depreciation is then calculated by multiplying this unit measure of activity by the actual units of activity. One of the benefits to using the units of output method of depreciation is that revenues and expenses tend to be better matched. However, the units of output method can be