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DEPRECIATION

Is

the decrease in the value of physical property with the passage of time.

The

present worth of all future profits that are to be received through ownership of a particular property.

The

amount which a willing buyer will pay to a willing seller for the property where each has equal advantage and is under no compulsion to buy or sell.

Is

what the property is worth to the owner as an operating unit.

The

value which is usually determined by a disinterested third party in order to establish a price that is fair to both seller and buyer.

Also

called Depreciated Book Value The worth of a property as shown on the accounting records of an enterprise.

Is

the price that can be obtained from the sale of property after it has been used.

The

amount the property would sell for if disposed off as junk.

1.

2.

To provide for the recovery of capital which has been invested in physical property. To enable the cost of depreciation to be charged to the cost of producing products or services that results from the use of property.

1.

Normal depreciation
1. Physical 2. Functional

2. 3.

Depreciation due to changes in price levels Depletion

Is

due to the lessening of the physical ability of a property to produce results.

Is

due to the lessening in the demand for the function which the property was designed to render.

It

is almost impossible to predict and therefore is not considered in economy studies.

It

refers to the decrease in the value of a property due to the gradual extraction of its contents.

The

length of time during which it is capable of performing function for which it was designed and manufactured.

The length of time during which the property may be operated at a profit.

1. 2. 3. 4.

It should be simple. It should recover capital. The book value will be reasonably close to the market value at any time. The method should be accepted by the Bureau of Internal Revenue.

L = useful life of the property in use CO = the original cost CL = the value at the end of life, the

scrap value (including gain or loss due to removal d = the annual cost of depreciation Cn = the book value at the end of n years Dn = depreciation up to age n years

It

assumes that the loss in value is directly proportional to the age of the property.

It

assumes that a sinking fund is established in which funds will accumulate for replacement.

It

is assumed that the annual cost of depreciation is a fixed percentage of the salvage value at the beginning of the year.

It

is very similar to the declining balance method except that the rate of depreciation k is replaced by 2/L.

method of depreciation which is also based on the assumption that the loss in the value of the fixed asset will be greater during the earlier years and will go on decreasing gradually with the decrease in the life of such asset.

dn

= Depreciation charge during the nth year


dn

= (depreciation factor)(total depreciation)


reverse digit

dn

= sum of digits (CO CL)

Year 1 2 3

Year in reverse order 5 4 3

Depreciation Factor 5/15 4/15 3/15

Depreciation during the year (5/15)(CO CL) (4/15)(CO CL) (3/15)(CO CL)

4
5

2
1

2/15
1/15

(2/15)(CO CL)
(1/15)(CO CL)

structure cost P12,000 new. It is estimated to have a life of 5 years with a salvage value of P1,000. Determine the book value at the end of each year of life.
CL = P12,000 CO = P1,000 L = 5 Years

Year 1 2 3

Year in reverse order 5 4 3

Depreciation during the year (5/15)(12,000 1,000) = P3,667 (4/15)(12,000 1,000) = P2,933 (3/15)(12,000 1,000) = P2,200

Book value at the end of year P8,333 P5,400 P3,200

4
5

2
1

(2/15)(12,000 1,000) = P1,467


(1/15)(12,000 1,000) = P733

P1,733
P1,000

machine cost P7,000, last 8 years and has a salvage value at the end of life of P350. Determine the depreciation charge during the 4th year and the book value at the end of 4 years.
CL = P7,000 CO = P350 L = 8 Years n = 4th year

1 2 3 4 5 6 7 8 = 36

8 7 6 5 = 26

Years 1 2 3

Years in reverse order 8 7 6

Depreciation charge P1,478 P1,293 P1,108

Book value P5,522 P4,229 P2,121

4
5 6 7 8

5
4 3 2 1

P924
P739 P555 P370 P185

P2,197
P1,458 P905 P535 P350

It

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

= total units of output up to the end of life Qn = total number of units of output during the nth year H = total working hours up to the end of life Hn = total working hours during the nth year.

A television Company purchased machinery for P100,000 on July 1, 1979. It is estimated that it will have a useful life of 10 year; scrap value of P4,000, production of 400,000 units and working hours of 120,000. The company uses the machinery for 14,000 hours in 1979 and 18,000 in 1980. The machinery produces 36,000 units in 1979 and 44,000 units in 1980. Compute the depreciation for 1980 using Working hours Output method

= P100,000 C = P4,000 T = 400,000 units H = 120,000 hours Q = 44,000 units H = 18,000 hours
L 80 80

CO

d80

= (100,000-4,000) X (18,000) 120,000 d = P14,400


80

d80

= (100,000-4,000) X (44,000) 400,000 d = P10,560


80

The

process of determining the value of certain property for specific reasons.

Is that element of value which a business has earned through favorable consideration and patronage of its customers arising from its well-known and well conducted policies and operation.

It

is an intangible item of value arising from the exclusive right of a company to provide a specific product or service in a stated region of the country.

It

is an intangible value which an actually operating concern has due to its operation.

It

is the amount of money spent in organizing a business and arranging for its financing and building.

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