Depreciation

Concept:

 is the cost of lost usefulness or cost of diminution of service yield from a use of fixed assets.
 a permanent fall in the value of fixed assets arising through wear and tear from the use of those assets in
business.

Depreciation is a measure of the wearing out, consumption or other loss of

 value depreciation asset arising from use, effluxion of time or obsolescence

 through technology and market changes. Depreciation is allocated so as to
 charge a fair proportion of the depreciable amount in each accounting period
 during the expected useful life of the asset. Depreciation includes
 amortization of assets whose useful life is predetermined.

Elements of Depreciation:

 FC – First Cost
 SV – Salvage Value
 D – Depreciation
 m – Arbitrary time
 n – lifespan (# of years)
 BVm– Book Value of that time (m)
 Dm– Depreciation of that time (m)

Methods:

 Straight Line Method or Fixed Installment

 Declining Charge Method or Diminishing or WDV
 Sum of Year Digit Method
 Inventory or Revaluation Method
 Annuity Method
 Depreciation Fund Method
 Machine Hour Method / Production Unit Method
 Depletion Method
Examples :

1. What is the value of an asset after 8 years of use if it depreciates from its original value of P120,000.00 to
its salvage value of 3% in 12 years?

2. A machine shop purchased 10 years ago a milling machine for P60,000. A straight line depreciation reserve
had been provided on a 20 years life of the machine. The owner of the machine shop desires to replace the
old
milling machine with a modern unit of many advantages costing P100,000. It can sold the old unit for P20,000.
How much net capital required for the purchase?

3. On 1 Jan 2011, Company A purchased a vehicle costingP20,000. The company expects the vehicle to be
operational for 4 years at the end of which it can be sold forP5,000. Calculate depreciation expense for the
year ended 31 Dec 2011, 2012, 2013 and 2014.

4. A fixed asset having a useful life of 3 years is purchased on 1 January 2013.Costof the asset
isP2,000whereas its residual value is expected to be P500. Calculate depreciation expense for the years
ending 30 June 2013 and 30 June 2014.

5. On the 1stJanuary 2013, the beginning of the financial year, Mr. Santos purchased machinery costing
P25,000. Its life was estimated to be 3 years and the salvage value at the end of this period was expected to
be P2,500. You are asked to calculate the depreciation to be written off by equal annual installments and to
show the Machinery and Depreciation accounts for 3 years to 31st of December 2015, when the machinery
was sold for 2,000 in cash.
Depreciation – Declining Balance

 Declining balance method is a common depreciation-calculation system that involves applying the
depreciation rate against the non-depreciated balance.

 Declining balance method doubles the depreciation rates.

 Using this method the Book Value at the beginning of each period is multiplied
by a fixed Depreciation Rate which is 200% of the straight line depreciation
rate, or a factor of 2

 The double declining balance calculation does not consider the salvage value
in the depreciation of each period however, if the book value will fall below
the salvage value, the last period might be adjusted so that it ends at the
salvage value.

 When double declining balance method does not fully depreciate an asset by
the end of its life

- Straight-Line Depreciation Percent = 100% / Useful Life

- Depreciation Rate = 2 x Straight-Line Depreciation Percent
- Depreciation for a Period = Depreciation Rate x Book Value at Beginning of
the Period
- If the first year is not a full 12 months and is a number M months, the first
and last years will be calculated
- First Year Depreciation Rate = M/12 x Depreciation Rate
- Last Year Depreciation Rate = (12-M)/12 x Depreciation Rate
Depreciation – Declining Balance

Example :

1. An asset costingP20,000has estimated useful life of 5 years and salvage value ofP4,500. Calculate the
depreciation for the first year of its life using double declining balance method.

2. An asset for a business costP1,750,000, will have a life of 10 years and the salvage value at the end of 10 years
will be P10,000. You calculate 200% of the straight-line depreciation, or a factor of 2, and multiply that value
by the book value at the beginning of the period to find the depreciation expense for that period.

3. A concrete mixer costs P2,500 and has a lifespan of 9 years and has a sell pace value of P500.
Using Double Balance find the end net book in year 5?

4. An asset amounting to P25,000 with an expected life of 5 years has a salvage value of P5,000. Calculate the
depreciation expense using the double declining balance

5. Let’s say you purchased a brand new computer, a monitor ,and a desk for your office. Below is a list of the
assets,

the cost basis for each and its useful life in years based on the IRS table.
Depreciation – Sum of Year Digit
 the sum of the years' digits method is used to accelerate the recognition of depreciation. Doing so means that
most of the depreciation associated with an asset is recognized in the first few years of its useful life.
 The method is more appropriate than the more commonly-used straight-line depreciation if an asset
depreciates more quickly or has greater production capacity in its earlier years than it does as it ages. The
total amount of depreciation is identical no matter which depreciation method is used - the choice of
depreciation method only alters the timing of depreciation recognition.
 A problem with using this or any other accelerated depreciation method is that it artificially reduces the
reported profit of a business over the near term. The result is excessively low profits in the near term,
followed by excessively high profits in later reporting periods.
 Use of the method can have an indirect impact on cash flows, since accelerated depreciation can reduce the
amount of taxable income, thereby deferring income tax payments into later periods.

Depreciation –Sum of Year Digit

Examples :

1. ABC Company purchases a machine forP100,000. It has an estimated salvage value ofP10,000and a useful life of
five years. The sum of the years' digits depreciation calculations

2. Use sum of the years' digits method of depreciation to prepare a depreciation

schedule of the following asset:

Cost $45,000
Salvage Value $5,000
Useful Life in Years 4
Asset is Depreciated Yearly
3. Calculate the sum of year digit depreciation method of an oven costing P50,000 with a useful life of 5 years and
a salvage value of P0.00.

4. Following information relates to a fixed asset:

Cost P250,000

ResidualValueP25,000

UsefulLife 3 Years

Calculate depreciation over the useful life of the asset using the sum of the years' digits method.

5.BnW frames bought a printing machine forP240,000. It is expected that machine has a useful life of 5 years at
the end of which residual value will be P30,000. Entity uses sum-of-years’-digits method to calculate depreciation.