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What circumstances might straight-line not be appropriate to use (excluding any tax purposes)?

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Business

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Q Many companies do use straight-line due to its simplicity and the belief that the assets are used uniformly over the
useful lives. But under what circumstances might straight-line not be appropriate to use (excluding any tax purposes)?
Straight_Line usage due to its simplicity:
The simplest and most commonly used depreciation method, straight line depreciation is calculated by
taking the purchase or acquisition price of an asset subtracted by the salvage value divided by the total
productive years the asset can be reasonably expected to benefit the company .
Straight_line method might not be appropriate to use due to
following circumstances:
It assumes that the fixed asset gives the same service or is used for the same amount of
frequency each year.
For some assets, we use it more in the first few years when it's brand-new and use it less as it
gets older and less efficient etc. Sometimes when business is very good, we will use it very often,
while if economy is bad like now we use it less.
It does not take into consideration the expenses of repairs and maintenance of the asset.
It does not provide funds for replacement of the asset.
It becomes difficult to calculate depreciation on additions made during a year.
Assets tend to lose value more quickly in their early years. Straight-line depreciation does not take
this fact into account. If you use assets as collateral for loans, the lender will assume your assets
lose more of their value in their first years, so your straight-line method will make asset look more
valuable on your books than it really is for the lender. The efficiency of a machine declines in its
later years and you will be writing off the same value in a later year as you did in the first year. The
machine actually will have less value for you than your depreciation amount indicates.
Does not reflect accurately the difference in usage of an asset from one period to the other.
Does not necessary match costs with revenues in different types of long-term assets.
Might not be appropriate for some depreciable assets due to rapidly developing technology, such
as computers.
Most pieces of office equipment, machinery and other items purchased do not perform exactly the
same each year. As assets age they become less efficient. Repair costs usually increase over
time. Straight-line depreciation does not account for the loss of efficiency or the increase in repair
expenses over the years and is, therefore, not as suitable for costly assets such as plant and
equipment. The functional life span of some assets cannot clearly be estimated. The straight-line
depreciation method should not be used when the useful life of an asset is unpredictable.

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Disadvantages of Straight-Line Depreciation
Most pieces of oce equipment, machinery and other items purchased do not perform exactly
the same each year. As assets age they become less ecient. Repair costs usually increase over time.
Straight-line depreciation does not account for the loss of eciency or the increase in repair expenses
over the years and is, therefore, not as suitable for costly assets such as plant and equipment. The
functional life span of some assets cannot clearly be estimated. The straight-line depreciation method
should not be used when the useful life of an asset is unpredictable.
Read more : http://www.ehow.com/info_8649742_advantages-disadvantages-straightline-depreciation.html

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Anonymous
Awesome! Perfect study aid.

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