Question

_____ is a variation of the 'Reducing Balance Method’.
1. Depletion Method
2. Production Units Method
3. Sum Of Years’ Digits Method
4. Machine Hour Method

Answer 1

Correct Answer - Option 3 : Sum Of Years’ Digits Method

The correct answer is Sum Of Years’ Digits Method

• Sum of years’ digits method: It is a form of accelerated depreciation that is based on the assumption that the productivity of the asset decreases with the passage of time. Under this method, a fraction is computed by dividing the remaining useful life of the asset on a particular date by the sum of the year’s digits.

• The reducing balance method of depreciation, also known as declining balance depreciation or diminishing balance depreciation, is a way of accounting for assets over a period of time. It is charged at a fixed rate, like the straight-line method (also known as the fixed installment method or straight-line depreciation). However, unlike the fixed installment method, the percent rate is not calculated on the cost of an asset but on the book value of the asset, which in turn is calculated by subtracting depreciation from its cost. 

• Depletion Method:  It refers to an accrual accounting method used to determine the expense of extracting natural resources from the earth, such as wood, minerals, and oil. 
• Production Units Method: The unit of production method is a method of calculating the depreciation of the value of an asset over time. It becomes useful when an asset's value is more closely related to the number of units it produces rather than the number of years it is in use.
• Machine Hour Method: Under this method, an hourly rate of depreciation is calculated. The cost of the asset (less residual value if any) is divided by the estimated working hours. The actual depreciation for any given period depends upon the working hours during that year.