Answer
Written Down Value method is a depreciation technique that applies a constant rate of depreciation to the net book value of assets each year, thereby recognizing more depreciation expenses in the early years of the life of the asset and less depreciation in the later years of the life of the asset. In short, this method accelerates the recognition of depreciation expenses systematically and helps businesses recognize more depreciation in the early years. It is also known as Diminishing Balance Method or Declining Balance Method.
The formula is as follows:Written Down Value Method = (Cost of Asset – Salvage Value of the Asset) * Rate of Depreciation in %
Whitefield Company purchased a Machinery costing $12000 with a useful life of 7 years and a residual value of $2000. The rate of Depreciation is 20%.
Solution:
Calculation of written down value (WDV) of depreciation can be done as follows –
Depreciation = ($12,000 – $2,000) * 20%
Depreciation = $2000
Calculation of end of the year can be done as follows –
Value at End of Year = ($12,000 – $2,000) – $2,000
Value at the End of Year = $8,000
Depreciation as per the Written down Value Method is calculated as follows:
Similarly, we can do the calculation, as shown above, for years 2 to 5.
Whitefield depreciated the Machinery using WDV Method, and as we can observe, the depreciation expense amount is higher during the initial years and kept reducing as the asset gets older.
- Written down Value Method helps in determining the depreciated value of the asset, which helps determine the price at which the asset should be sold.
- It applies a higher amount of depreciation in the initial years of the useful life of the asset. It is an ideal method to record depreciation of assets, which lose their value quickly. An example of such assets could be any Technological development software by an IT company. By recognizing accelerated depreciation in the early years, the business can determine its fair market value on the Balance Sheet before the technology becomes outdated.
- Higher Depreciation during initial years results in reduced taxes, or we say deferral of taxes to later years for the business on account of lower Net Income but increased Cash profits as Depreciation is a Non-cash expense.
