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Depreciation

1. Depreciation is the decrease in value of property over time. There are several methods to calculate depreciation including straight-line, sinking fund, declining balance, and sum of the years' digits. 2. The document provides examples and practice problems for each depreciation method. It explains how to calculate annual depreciation, total depreciation, and book value for assets over multiple years using the different approaches. 3. Modified Accelerated Cost Recovery System (MACRS) is also covered, with an explanation of how to calculate depreciation charges for the first several years of an asset.

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Conchito Galan Jr II
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363 views21 pages

Depreciation

1. Depreciation is the decrease in value of property over time. There are several methods to calculate depreciation including straight-line, sinking fund, declining balance, and sum of the years' digits. 2. The document provides examples and practice problems for each depreciation method. It explains how to calculate annual depreciation, total depreciation, and book value for assets over multiple years using the different approaches. 3. Modified Accelerated Cost Recovery System (MACRS) is also covered, with an explanation of how to calculate depreciation charges for the first several years of an asset.

Uploaded by

Conchito Galan Jr II
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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DEPRECIATION

Is the decrease in value of property due to the passage


of time.
DEPRECIATION
Is the decrease in value of property due to the passage
of time.
Methods of Computing depreciation:

1. Straight line depreciation


FC − SV
A. D = annual depreciation =
n
B. Dm = total depreciation after m years = m D
C. BVm = book value after m years = FC - Dm
D. Depreciation rate = D
FC
DEPRECIATION

1. Straight line depreciation

SV
E. Salvage Rate =
FC
F. Sunk Cost = Book Value - Actual Resale value
Where:
FC = first cost
SV = salvage value
n = life of the property or equipment
Practice Problems – Straight Line Method
1. A diesel engine has a first cost of P100,000 and salvage value of
P20,000 after 10 years. Determine the annual depreciation using
straight line method.
2. The annual depreciation of P20,000 has been reserve for a
machine for a machine using straight line for 8 years. If the first
cost is P200,000, determine the salvage value of the machine.
3. A machine has a first cost of P80,000 and salvage value of 10,000
for 10 years. Using straight line, determine the book value after 6
years.
DEPRECIATION

2. Sinking Fund method


DEPRECIATION

2. Sinking Fund method


(FC − SV ) i
A. D = annual depreciation =
(1 + i)n − 1
 (1 + i)m − 1
B. Dm = total depreciation after m years = D  
 i 
C. BVm = FC - Dm
D. Sunk Cost = BV - Actual resale value
Practice Problems – Sinking Fund Method
1. Water pipe has a first cost of P20,000 and no salvage value after
15 years. Using sinking fund depreciation, determine the annual
depreciation for 16% interest.
2. A gasoline engine has an annual depreciation of P10,000 for 10
years and salvage value P18,000. Using sinking fund depreciation
with 12% interest. Determine the first cost of the engine.
DEPRECIATION
3. Declining Balance Method
DEPRECIATION
3. Declining Balance Method
SV
A. k = constant ratio = 1− n
FC
B. Annual depreciation
Depreciation for the first 5 years:
D1 = k (FC)(1 – k)0 D2 = k (FC)(1 – k)1
D3 = k (FC)(1 – k)2 D4 = k (FC)(1 – k)3
D5 = k (FC)(1 – k)4
Therefore, annual depreciation for any year is:
Dn = k(FC)(1 - k)n-1
DEPRECIATION

3. Declining Balance Method

C. Total Depreciation after 5 years:


DT5 = D1 + D2 + D3 + D4 + D5

D. Book Value after 5 years

BV5 = FC − D T 5 = FC(1 − k )m
Practice Problems – Declining Balance Method
1. An equipment has a first cost of P20,000 and a salvage value of
P1000 at the end of 10 years. Determine the book value after 6
years using declining balance method.
2. An equipment has a first cost of P20,000 has a salvage value of
P2,000 after 10 years . What is the depreciation after 3 years using
declining balance method?
DEPRECIATION

4. Sum of the Years Digit Method (SOYD)


For 8 years (n = 8)
SOYD = 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 = 36
 1+ n   1+ 8 
Using the formula: SOYD =   n =   8 = 36
 2   2 
A. Depreciation for the first 5 years:
D1 = (FC - SV) (8/36)
D2 = (FC - SV) (7/36)
D3 = (FC - SV) (6/36)
D4 = (FC - SV) (5/36)
D5 = (FC - SV) (4/36)
DEPRECIATION

4. Sum of the Years Digit Method (SOYD)

B. DT5 = total depreciation after 5 years


DT5 = D1 + D2 + D3 + D4 + D5
8 + 7 + 6 + 5 + 4
D
Shortcut method: T5 = (FC - SV)  
 36 
C. BV5 = book value after 5 years
BV5 = FC – DT5
Practice Problems – Sum of the Years Digit Method
1. A machine that has a life of 8 years will have a salvage value of P18,000.
If the first cost is P90,000, determine the book value after 5 years using
sum of the years digit method.
2. A generator has a first cost of P500,000, installation cost of P50,000 has
an estimated salvage value of P50,000 after 12 years. Using sum of the
years digit method, determine the book value after 3 years.
DEPRECIATION

5. Modified Accelerated Cost Recovery System (MACRS)

A. Depreciation charge for the first 5 years:


D1 = FC/n
D2 = 2/n (FC – D1)
D3 = 2/n [FC – (D1 + D2)]
D4 = 2/n [FC – (D1 + D2 + D3)]
D5 = 2/n [FC – (D1 + D2 + D3 + D4)]
B. BV5 = FC – (D1 + D2 + D3 + D4 + D5)
Practice Problems – MACRS Depreciation
1. An equipment has a first cost of P25,000 and a salvage value of P2000 at
the end of 10 years. Determine the book value after 4 years using MACRS
depreciation method

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