Professional Documents
Culture Documents
REPORTING AND
ANALYZING LONGLIVED ASSETS
1
Depreciation
The process of allocating the cost of a plant
asset over its useful life in a rational and
systematic manner.
Depreciation is not a process of asset valuation.
Depreciable Assets
The revenue-producing ability of an asset
declines during its useful life because of
wear and tear.
Land
Does not depreciate since its usefulness and
revenue producing ability generally remain
intact, or increase.
Accumulated Depreciation
The balance in Accumulated Depreciation
is
The total amount of the assets depreciation
expense to date
Not a cash fund
Factors in Computing
Depreciation
Depreciation Methods
Straight-Line
Sum-of-Years
Units-of-Activity
Example 1
Robert Parish Corporation purchased a new
machine on January 2005. The cost of this
machine was $117,900. The company estimated
that the machine would have a salvage value of
$12,900 at the end of its service life. Its life is
estimated at 5 years and its working hours are
estimated at 1,000 hours. Year-end is December
31.
Instructions:
Compute the depreciation expense using the
straight line method.
8
Cost
Residual
Depreciable Value
Years of Useful Life
Depreciation Expense
117900
12900
105000
5
21000
117900 12900
105000 / 5
10
11
12
13
14
15
16
Example 2
Robert Parish Corporation purchased a new
machine on January 2005. The cost of this
machine was $117,900. The company estimated
that the machine would have a salvage value of
$12,900 at the end of its service life. Its life is
estimated at 5 years and its working hours are
estimated at 1,000 hours. Year-end is December
31.
Instructions: Compute the depreciation expense
using Sum of the Years method.
17
Cost
Residual
Depreciable Value
Years of useful life
117900
12900
105000
5
18
19
20
21
22
23
24
25
Example 3
Robert Parish Corporation purchased a new
machine on January 2005. The cost of this
machine was $117,900. The company estimated
that the machine would have a salvage value of
$12,900 at the end of its service life. Its life is
estimated at 5 years and its working hours are
estimated at 1,000 hours. Year-end is December
31.
Instructions: Compute the depreciation expense
using the units of production method ( Working
hours are: 200, 150, 250, 300, 100 respectively.
26
Cost
Residual
Depreciable Value
working hours
rate per hour
117900
12900
105000
1000
105
27
28
29
30
31
32
33
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