You are on page 1of 34

# 6

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.

## A decline in revenueproducing ability may

also occur because of
obsolescence.
3

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

## Year Depreciable Years Depreciation Accumulated

Value
Expense Depreciation
2005 105000
5
21000
21000
2006 105000
5
21000
42000
2007 105000
5
21000
63000
2008 105000
5
21000
84000
2009 105000
5
21000
105000
105000

10

## Year Depreciable Years Depreciation Accumulated

Value
Expense Depreciation
2005 105000
5
21000
21000
2006 105000
5
21000
42000
2007 105000
5
21000
63000
2008 105000
5
21000
84000
2009 105000
5
21000
105000
105000

11

## Year Depreciable Years Depreciation Accumulated

Value
Expense Depreciation
2005 105000
5
21000
21000
2006 105000
5
21000
42000
2007 105000
5
21000
63000
2008 105000
5
21000
84000
2009 105000
5
21000
105000
105000

12

## Year Depreciable Years Depreciation Accumulated

Value
Expense Depreciation
2005 105000
5
21000
21000
2006 105000
5
21000
42000
2007 105000
5
21000
63000
2008 105000
5
21000
84000
2009 105000
5
21000
105000
105000

13

## Year Depreciable Years Depreciation Accumulated

Value
Expense Depreciation
2005 105000
5
21000
21000
2006 105000
5
21000
42000
2007 105000
5
21000
63000
2008 105000
5
21000
84000
2009 105000
5
21000
105000
105000

14

## Year Depreciable Years Depreciation Accumulated

Value
Expense Depreciation
2005 105000
5
21000
21000
2006 105000
5
21000
42000
2007 105000
5
21000
63000
2008 105000
5
21000
84000
2009 105000
5
21000
105000
105000

15

## Year Depreciable Years Depreciation Accumulated

Value
Expense Depreciation
2005 105000
5
21000
21000
2006 105000
5
21000
42000
2007 105000
5
21000
63000
2008 105000
5
21000
84000
2009 105000
5
21000
105000
105000

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

## Year Depreciation Years Depreciation Accumulated

Value
Expense Depreciation
2005 105000
5/15
35000
35000
2006 105000
4/15
28000
63000
2007 105000
3/15
21000
84000
2008 105000
2/15
14000
98000
2009 105000
1/15
7000
105000
105000

19

## Year Depreciation Years Depreciation Accumulated

Value
Expense Depreciation
2005 105000
5/15
35000
35000
2006 105000
4/15
28000
63000
2007 105000
3/15
21000
84000
2008 105000
2/15
14000
98000
2009 105000
1/15
7000
105000
105000

20

## Year Depreciation Years Depreciation Accumulated

Value
Expense Depreciation
2005 105000
5/15
35000
35000
2006 105000
4/15
28000
63000
2007 105000
3/15
21000
84000
2008 105000
2/15
14000
98000
2009 105000
1/15
7000
105000
105000

21

## Year Depreciation Years Depreciation Accumulated

Value
Expense Depreciation
2005 105000
5/15
35000
35000
2006 105000
4/15
28000
63000
2007 105000
3/15
21000
84000
2008 105000
2/15
14000
98000
2009 105000
1/15
7000
105000
105000

22

## Year Depreciation Years Depreciation Accumulated

Value
Expense Depreciation
2005 105000
5/15
35000
35000
2006 105000
4/15
28000
63000
2007 105000
3/15
21000
84000
2008 105000
2/15
14000
98000
2009 105000
1/15
7000
105000
105000

23

## Year Depreciation Years Depreciation Accumulated

Value
Expense Depreciation
2005 105000
5/15
35000
35000
2006 105000
4/15
28000
63000
2007 105000
3/15
21000
84000
2008 105000
2/15
14000
98000
2009 105000
1/15
7000
105000
105000

24

## Year Depreciation Years Depreciation Accumulated

Value
Expense Depreciation
2005 105000
5/15
35000
35000
2006 105000
4/15
28000
63000
2007 105000
3/15
21000
84000
2008 105000
2/15
14000
98000
2009 105000
1/15
7000
105000
105000

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

## Year Hours Rate per Depreciation Accumulated

Used Hour
Expense Depreciation
2005 200
105
21000
21000
2006 150
105
15750
36750
2007 250
105
26250
63000
2008 300
105
31500
94500
2009 100
105
10500
105000
105000

28

## Year Hours Rate per Depreciation Accumulated

Used Hour
Expense Depreciation
2005 200
105
21000
21000
2006 150
105
15750
36750
2007 250
105
26250
63000
2008 300
105
31500
94500
2009 100
105
10500
105000
105000

29

## Year Hours Rate per Depreciation Accumulated

Used Hour
Expense Depreciation
2005 200
105
21000
21000
2006 150
105
15750
36750
2007 250
105
26250
63000
2008 300
105
31500
94500
2009 100
105
10500
105000
105000

30

## Year Hours Rate per Depreciation Accumulated

Used Hour
Expense Depreciation
2005 200
105
21000
21000
2006 150
105
15750
36750
2007 250
105
26250
63000
2008 300
105
31500
94500
2009 100
105
10500
105000
105000

31

## Year Hours Rate per Depreciation Accumulated

Used Hour
Expense Depreciation
2005 200
105
21000
21000
2006 150
105
15750
36750
2007 250
105
26250
63000
2008 300
105
31500
94500
2009 100
105
10500
105000
105000

32

## Year Hours Rate per Depreciation Accumulated

Used Hour
Expense Depreciation
2005 200
105
21000
21000
2006 150
105
15750
36750
2007 250
105
26250
63000
2008 300
105
31500
94500
2009 100
105
10500
105000
105000

33

## Year Hours Rate per Depreciation Accumulated

Used Hour
Expense Depreciation
2005 200
105
21000
21000
2006 150
105
15750
36750
2007 250
105
26250
63000
2008 300
105
31500
94500
2009 100
105
10500
105000
105000

34