Lesson 3:

STRAIGHT LINE MTD

SINKING FUND MTD
DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD
SUM-OF-THE-YEARS DIGIT MTD

SERVICE OUTPUT MTD

INTRODUCTION

The

of the physical property

such as equipment, building
or other properties due to
the passage of time

INTRODUCTION

the

of all the future profits

that are to be received
through ownership of a
particular property

MARKET Value
UTILITY or USE Value
FAIR Value
BOOK Value
SALVAGE Value
SCRAP Value

INTRODUCTION

1.

Normal Depreciation
a.
b.

2.
3.

Physical Depreciation
Functional Depreciation

Depreciation due to changes in price levels

Depletion

INTRODUCTION
ECONOMIC DEPRECIATION
the gradual decrease in utility in
an asset with use and time

PHYSICAL
DEPRECIATION

FUNCTIONAL
DEPRECIATION

DEPRECIATION
ACCOUNTING DEPRECIATION
The systematic allocation of an
assets value in portions over
its depreciable lifeoften used
in engineering economic
analysis

BOOK
DEPRECIATION

TAX
DEPRECIATION

INTRODUCTION

length

of time during
which it is
for which it
designated
manufactured.

was
&

length

of time during
which time property
may be

METHODS

IN DETERMINING THE

DEPRECIATION
OF A PROPERTY

STRAIGHT LINE MTD

SINKING FUND MTD
DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD
SUM-OF-THE-YEARS DIGIT MTD

SERVICE OUTPUT MTD

METHODS IN DETERMINING THE DEPRECIATION

of depreciation at nth year

:
after n years
:
on
total loss value after n years
:

after n years

:
: value at the end of the life
:
value
(unless indicated)

after L years

after n years

:
:

of property (in yrs)

of property in n yrs

NOTE: In general,

n L
Dn d1 d 2 d 3 d n
Cn C0 Dn

METHODS
IN DETERMINING THE

DEPRECIATION

STRAIGHT
LINE METHOD
(SLM)

OF A PROPERTY

STRAIGHT LINE MTD

SINKING FUND MTD
DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD
SUM-OF-THE-YEARS DIGIT MTD

SERVICE OUTPUT MTD

STRAIGHT LINE METHOD (SLM)

assume

that the loss in value

is
to the age of the property

Dn n

Dn k n

Dn d n

Dn C0 Cn
d

n
n
Dn C0 Cn
d

n
n

Dn d n
Cn C0 Dn

STRAIGHT LINE METHOD (SLM)

1.

2.

An asset is purchased for P500,000. The salvage value in

25 yrs id P100,000. What is the annual cost of
depreciation in the first 3 years using straight line
method (SLM)?
A large profitable corporation has purchased a jet plane
for the use of its executives. The cost of the plane is
P76M. I has a useful life of 5 years. The estimated resale
value at the end of 5 years is P6M. Using SLM, what is
the book value of the jet at the end of 3 yrs.

METHODS
IN DETERMINING THE

SINKING
FUND
METHOD
(SFM)

DEPRECIATION
OF A PROPERTY

STRAIGHT LINE MTD

SINKING FUND MTD

DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD
SUM-OF-THE-YEARS DIGIT MTD
SERVICE OUTPUT MTD

SINKING FUND METHOD (SFM)

Assumes

that the sinking fund is

established in which funds will
accumulated for replacement.
Considers
the time-money
relationship (annuity)

Dn

C0-CL

Dn d F / A, i &, n

Dn

1 i 1

C0 C n

1 i n 1

1 i n 1
Dn d

Cn C0 Dn

SINKING FUND METHOD (SFM)

1.

2.

3.

A plant erected to manufacture socks has a first cost of

P10,000,000 with an estimated salvage value of P100,000 at the
end of 25 years. Find the book value after 10 years using SFM,
assuming 6% interest rate.
A unit of welding machine cost P45,000 with an estimated life for
5 years. Its salvage value id P2,500. Find its depreciation rate by
using SFM. Assume i=8.5%
An equipment bought for P30,000 six years ago. It will have a
salvage value of P3,000, 4 years from now. It is sold for P8,000.
What is the SUNK COST if SFM is used with 6% interest rate.

METHODS
IN DETERMINING THE

DECLINING
BALANCE
METHOD
(DBM)

DEPRECIATION
OF A PROPERTY

STRAIGHT LINE MTD

SINKING FUND MTD

DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD
SUM-OF-THE-YEARS DIGIT MTD
SERVICE OUTPUT MTD

DECLINING BALANCE METHOD (DBM)

NOTE: This method does not apply
when salvage value, CL=0
also

called

the
or
.

assume

that the annual cost of

depreciation, is a fixed percentage of
salvage value at the beginning of the
year.
The

ratio of depreciation in any year

to the book value at the beginning of
that year is constant throughout the
life of property and is designated by
, , rate of depreciation

Cn
CL
k 1 n
1 L
C0
C0
d n C0 k 1 k

n 1

Dn C0 Cn C0 1 1 k
Cn C0 1 k

CL C0 1 k

CL
Cn C0
Cn

n
L

DECLINING BALANCE METHOD (DBM)

1.

An induction motor has a first cost of P20,000 and a

salvage value of P1,000 at the end of 10 years. Determine
the book value after 6 years using DBM.

2.

Find the salvage value of the machine which has a 25

years economic life and cost P2.5M at its 5th year of
operation. It has a first cost of P3.76M.

METHODS

DOUBLE
DECLINING
BALANCE
METHOD
(DDBM)

IN DETERMINING THE

DEPRECIATION
OF A PROPERTY

STRAIGHT LINE MTD

SINKING FUND MTD

DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD

SUM-OF-THE-YEARS DIGIT MTD

SERVICE OUTPUT MTD

DOUBLE DECLINING BALANCE METHOD (DDBM)

2
k
L
this

method is very similar to

declining balance method
except the rate of depreciation,
, is replaced by
.
NOTE:

This

method does not apply

when salvage value, CL=0
Salvage Value
be
subtracted from the first cost
when calculating depreciation
charge

2
2
d n C0 1
L
L

n 1

Dn C0 Cn C0 1 1 k
2
Cn C0 1
L

2
CL C0 1
L

DOUBLE DECLINING BALANCE METHOD (DDBM)

1.

Determine the rate of depreciation, the total

depreciation up to the end of 8th year and the book value
at the end of 8 years for an asset that costs P15,000 new
and has an estimated scrap value of P2,000 at the end 10
years by using
(a) DBM
(b) DDBM

METHODS
IN DETERMINING THE

SUM-OF-THEYEARS-DIGITS
METHOD
(SOYD)

DEPRECIATION
OF A PROPERTY

STRAIGHT LINE MTD

SINKING FUND MTD
DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD
SUM-OF-THE-YEARS DIGIT MTD

SERVICE OUTPUT MTD

SUM-OF-THE-YEARS-DIGITSS METHOD (SOYD)

2L n 1
C0 C L
dn
LL 1

Let
= depreciation during the nth year
= (depreciation factor)
X (total depreciation, DL)

n2 L n 1
C0 CL
Dn
LL 1

Dn d1 d 2 d3 ... d n
reverse digit
C0 CL
dn
SOYD

Cn C0 Dn

SUM-OF-THE-YEARS-DIGITS METHOD (SOYD)

1.

An asset is purchased for P9,000. Its estimated life is 10

years. After which it will be sold P1,000. Find the book
value during the 3rd year if SOYD method is used.

2.

A company purchases an asset for P10K and plans to

keep it for 20 years. If the salvage value is zero at the end
of 20 years, what is the depreciation in the 3rd year using
SOYD method.

METHODS
IN DETERMINING THE

SERVICEOUTPUT
METHOD
(SOM)

DEPRECIATION
OF A PROPERTY

STRAIGHT LINE MTD

SINKING FUND MTD

DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD
SUM-OF-THE-YEARS DIGIT MTD
SERVICE OUTPUT MTD

SERVICE- OUTPUT METHOD (SOM)

(No. of Hours Used)

that
the
total
depreciation that ha taken place
is directly proportional to the
quantity of output of the
property up to that time.

Hn
C0 C L
H

dn

Assumes

at nth year

with useful life

This

method has the advantage

of making the unit cost of
depreciation constant and giving
low depreciation expense during
periods of low production

(No. of Hours Used)

dn

at nth year

Tn
C0 C L
T

with
useful life

SERVICE- OUTPUT METHOD (SOM)

1.

A Television Company purchased machinery for P100,000 on July 1, 2013. It is

estimated that it will have a useful life of 10 years; scrap value of P4,000,
productions of 400,000 units and working hours of 120,000.
The company uses the machinery for 14,000 hrs in 2013 and 18,000 hours in
2014. The machinery produces 36,000 units in 2013 and 44,000 units in 2014.
Compute the depreciation for 2014 using each method :
(a) Working Hours Mtd
(b) Output Mtd
(c) SLM
(d) SFM with 9% interest rate
(e) DBM
(f) DDBM
(g)SOYD

Lesson 3:

STRAIGHT LINE MTD

SINKING FUND MTD
DECLINING BALANCE MTD
DOUBLE DECLINING BALANCE MTD
SUM-OF-THE-YEARS DIGIT MTD

SERVICE OUTPUT MTD