DECISIONS UNDER

CERTAINTY
 DEPRECIATION
◦ Is the reduction or fall in the value of an asset or physical property during the course of
its working life and due to passage of time.
◦ Value- is the money worth of an asset or product. It is also refers to the present worth of
all future profits that are to be received through ownership of a particular property.
◦ Market Value- is the amount of a willing buyer will pay to a willing seller for a property
where each has equal advantage and neither one of them is under the compulsion to
buy or sell.
◦ Book Value- Is the worth of the property as reflected in the book of records of the
company.
◦ Use value- is the amount of the property which the owner believed to be its worth as an
operating unit.
◦ Fair value- is the worth of the property determined by a disinterest person in order to
establish an amount which is fair to both the buyer and seller.
◦ Salvage value- is the amount obtained from the sale of property. Implies that the
property will still be use for the purpose it is intended.
◦ First Cost- is the delivered and installed cost of the asset including purchase price,
installation fees, and any other depreciable cost.
◦ Recovery Period- is the depreciable life in “n” years.
◦ Depreciation rate or Recovery rate- is the fraction of the first cost removed by the
depreciation each year.
◦ Personal Property- is the income producing tangible possessions of a corporation.
Examples; vehicles, manufacturing equipment, construction assets, etc.
◦ Real property- includes real state and all improvements, office building, factories,
warehouses, apartments and other structures.
 SINKING FUND DEPRECIATION
◦ This method assumes that the loss in value is directly proportional to the age of the property.
◦ ANNUAL SINKING FUND DEPRECIATION

[(𝑭𝑪−𝑺𝑽) (𝒊)]
D= Where: FC= First Cost n= Recovery period
𝟏+𝒊 𝒏 −𝟏
SV= Salvage Value i= SV/FC

◦ Book Value after “t” years of service

BV= FC - Dt
Where: BV= Book Value

𝑫[ 𝟏+𝒊 𝒕 −𝟏]
Dt= Dt= Total depreciation after “t” years
(𝒊)
EXAMPLES
1. An equipment costs P10000 with salvage value of P500 at the end of 10 yrs.
Calculate the annual depreciation cost by sinking fund method at 40% interest.
Given: SV= 500 FC= 10000 n= 10 i= 0.4
Find: D=?
Solution:

[(𝐹𝐶−𝑆𝑉) (𝑖)]
D= =
[(10000−500) (0.4)]
= 136.1
1+𝑖 𝑛 −1 1+0.4 10 −1
2. A P110,000 chemical plant had an estimated life of 6 years and
a projected scrap value of P10,000, after 3 years of operation an
explosion made it a total loss. How much money would have to be
raised to put up a new plant costing P150,000, if a depreciation
reserved has been maintained during its 3 years of operation by
sinking fund depreciation?
Given: FC= 110,000 SV= 10,000 i= SV/FC= 10000/110000= 0.09
t= 3 years n= 6years
Find: BV
 [(𝐹𝐶−𝑆𝑉) (𝑖)]
Solution: BV= FC – Dt D= 𝐷[ 1+𝑖 𝑡 −1]
Dt=
1+𝑖 𝑛 −1 (𝑖)

[(𝐹𝐶−𝑆𝑉) (𝑖)] [(110000−10000) (0.09)]

D= = = 13,291.98
1+𝑖 𝑛 −1 1+0.09 6 −1

𝐷[ 1+𝑖 𝑡 −1] 13291.98[ 1+0.09 3 −1]

Dt= = = 43,572.44
(𝑖) (0.09)

BV= FC – Dt= 110,000 – 43,572.44 = 66,427.56

3. A certain machinery costs P50000, last 12 years with a salvage value of
P5000 money is worth 5%, if the owner decides to sell it after using it for 5
years, what should it is price so that he will not lose or gain financially in
the transaction? Use sinking fund depreciation.
Given: FC= 50000 SV= 5000 i= 0.05 t= 5 years n= 12 years
Find: BV
Solution:
[(𝐹𝐶−𝑆𝑉) (𝑖)] [(50000−5000) (0.05)]
D= 𝑛 = 12 −1 = 2827.14
1+𝑖 −1 1+0.05
 𝐷[ 1+𝑖 𝑡 −1] 2827.14[ 1+0.05 5 −1]
Dt= = = 15,621.75
(𝑖) (0.05)

BV= FC – Dt= 50,000 – 15,621.75 = 34,378.25

STRAIGHT LINE DEPRECIATION
◦ Is considered the standard against which any depreciation method is compared. It
derives its name from the fact that the book value declares linearly with time.

◦ Annual Straight Line Depreciation -Book value after “t” years of service
𝑭𝑪−𝑺𝑽 𝑫 𝑭𝑪−𝑺𝑽
D= i= Dt= 𝒙 𝒕 BV= FC – Dt
𝒏 𝑭𝑪 𝒏

Where: FC= First Cost

n= Recovery period
SV= Salvage Value
BV= Book Value
Dt= Total depreciation after “t” years
EXAMPLE
◦ A machine has an initial cost of P50,000 and a salvage value of P10,000 after 10 years.
Find the book value after 5 years using straight line depreciation.
Given: FC= 50,000 SV= 10,000 n= 10 t= 5
Find: BV
𝑭𝑪−𝑺𝑽
Solution: BV= FC – Dt Dt= 𝒙 𝒕
𝒏
𝑭𝑪−𝑺𝑽
BV= FC – [ 𝒙 𝒕]
𝒏
𝟓𝟎𝟎𝟎𝟎−𝟏𝟎𝟎𝟎𝟎
BV= 50,000 –[ 𝒙 𝟓]
𝟏𝟎
BV= 30,000
◦ The cost of equipment is P500,000 and the cost of installation is P30,000. If the salvage
value is 10% of the cost of equipment at the end 0f 5 years. Determine the book value
at the end of fourth year. Use straight line depreciation.
Given: FC= 500,000+30,000= 530,000 SV= 500,000x0.10= 50000
Find: BV
𝑭𝑪−𝑺𝑽
Solution: BV= FC – Dt Dt= 𝒙 𝒕
𝒏
𝑭𝑪−𝑺𝑽
BV= FC – [ 𝒙 𝒕]
𝒏
𝟓𝟑𝟎𝟎𝟎𝟎−𝟓𝟎𝟎𝟎𝟎
BV= 530,000 –[ 𝒙 𝟒]
𝟓
BV= 146,000
◦ A machine has an initial cost of P50,000 and a salvage value of P10,000 after 10 years.
What is the straight depreciation rate as a percentage of the initial cost?
Given: FC= 50,000 SV= 10,000 n= 10
Find: I
𝑭𝑪−𝑺𝑽 𝑫
Solution: D= i=
𝒏 𝑭𝑪
𝟓𝟎𝟎𝟎𝟎−𝟏𝟎𝟎𝟎𝟎
D= = 𝟒𝟎𝟎𝟎
𝟏𝟎
𝟒𝟎𝟎𝟎
i= 𝒙 𝟏𝟎𝟎 = 𝟖%
𝟓𝟎𝟎𝟎𝟎
SUM OF YEARS DIGIT METHOD
◦ Sum of the years digit
𝒏(𝒏+𝟏)
Σyears= 𝟐

Respective depreciation charges:

1st year 2nd year
𝒏 𝒏−𝟏
D1= (FC – SV) Σyears D1= (FC – SV) Σyears

3rd year
𝒏−𝟐
D1= (FC – SV) Σyears
EXAMPLES
◦ An asset is purchased for P9000. Its estimated life is 10 years after which it will be sold for
P1000. find the book value during the first year if Sum of years depreciation is used.
Given: FC= 9000 SV= 1000 n=10
Find: BV
𝒏 𝒏(𝒏+𝟏) 𝟏𝟎(𝟏𝟎+𝟏)
Solution: D1= (FC – SV) Σyears Σyears= = = 55 years
𝟐 𝟐

= P1454.55
𝒏 𝟏𝟎
D1= (FC – SV) Σyears = (9000 –1000) 𝟓𝟓
◦ A company purchases an asset for P10000 and plans to keep it for 20 years. If the
salvage value is zero at the end of 20th year. What is the depreciation in the third year?
Given: FC= 10000 SV= 0 n= 20
Find: D3
𝒏−𝟐 𝒏(𝒏+𝟏) 𝟐𝟎(𝟐𝟎+𝟏)
Solution: D3= (FC – SV) Σyears Σyears= = = 210
𝟐 𝟐

𝒏−𝟐 𝟐𝟎−𝟐
D3= (FC – SV) Σyears = (10000 – 0) 210 = P857.14
◦ The corporation purchased a machine for P1,000,000. Freight and installation charges
amounted to 3% of the purchase price. If the machine shall be depreciated over a
period of 8 years with a salvage value of 12% of the first cost. Determine the
depreciation charged during the 5th year using the SYD.
◦ Given: FC= 1,000,000 x 0.03 = 30000 SV= 1,030,000 x 0.12
◦ FC = 1,000,000 + 30,000 = 1,030,000 SV = 123,600 n= 8
Find: D5
𝒏−𝟒 𝒏(𝒏+𝟏) 𝟖(𝟖+𝟏)
Solution: D5= (FC – SV) Σyears Σyears= = = 36
𝟐 𝟐

𝒏−𝟒 𝟖−𝟒
D5= (FC – SV) Σyears = (1,030,000 – 123,600) 36 = P100,711.11
Declining Balance Depreciation
◦ Also known as diminishing balance depreciation or constant percentage Depreciation.
◦ It is assumed that the annual cost of depreciation is a fixed percentage of the salvage
value at the beginning of the year.
◦ The ratio of the depreciation in any year to the book value at the beginning of that
year is constant throughout the life of the property and is designated by, the rate of
depreciation.
◦ Depreciation rate (k)
𝒌 = 𝟏 − 𝒏 𝑺𝑽/𝑭𝑪

◦ Book value after “t” years of service

BV = 𝑭𝑪(𝟏 − 𝒌)𝒕
◦ Depreciation charge

D = 𝑭𝑪(𝟏 − 𝒌)𝒕−𝟏 𝒌
Double Declining Balance Depreciation – the salvage value should not be subtracted
from the first cost when calculating the depreciation charge.
𝟐
k=
𝒏
EXAMPLES
Determine the rate of depreciation, the total depreciation up to the end of the 8th year
and the book value at the end of 8 years for an asset that costs P15,000 new and has
estimated scrap value of P2,000 at the end 10 years by (a) the declining balance
method and (b) the double declining balance method.
◦ Given: FC= 15,000 SV= 2,000 n= 10 t=8
◦ Find: Dt
◦ Solution: 𝒌 = 𝟏 − 𝒏 𝑺𝑽/𝑭𝑪 BV = 𝑭𝑪(𝟏 − 𝒌)𝒕 D = 𝑭𝑪(𝟏 − 𝒌)𝒕−𝟏 𝒌
◦ (A)
𝟏𝟎 𝟐𝟎𝟎𝟎
◦ 𝒌 = 𝟏 − 𝒏 𝑺𝑽/𝑭𝑪= 𝟏 − = 0.1825 or 18.25%
𝟏𝟓𝟎𝟎𝟎

◦ BV = 𝑭𝑪(𝟏 − 𝒌)𝒕 = 15000 (𝟏 − 𝟎. 𝟏𝟖𝟐𝟓)𝟖 = 2992

◦ Dt = FC – BV = 15000 – 2992= 12,008
◦ (b) double declining balance method
𝟐 𝟐
k= 𝒏 = 𝟏𝟎 = 0.2 or 20%

BV = 𝑭𝑪(𝟏 − 𝒌)𝒕 = 15000 (𝟏 − 𝟎. 𝟐)𝟖 = 𝟐𝟓𝟏𝟕

Dt= FC – BV = 15,000 – 2,517 = 12,483

A machine having a certain first cost has a life of 10 years and a salvage value of 6.633%
of the first cost at the end of 10 years. If it has a book value of P58914 at the end of the
6th year. How much is the first cost of the machine if the constant percentage of
declining value is used?
◦ Given: SV= 0.06633FC BV= 58914 t= 6 n=10
◦ Find: FC?
◦ SOLUTION:
BV= FC (𝟏 − 𝒌)𝒕 𝒌 = 𝟏 − 𝒏 𝑺𝑽/𝑭𝑪 58,914= FC (𝟏 − 𝟎. 𝟐𝟒)𝟔
𝟏𝟎 𝟎.𝟎𝟔𝟔𝟑𝟑𝑭𝑪
K = 𝟏 − 𝒏 𝑺𝑽/𝑭𝑪 = 𝒌 = 𝟏 − = 0.24 FC= 305,729.23
𝑭𝑪
You own earth moving equipment that cost P90,000. After 8 years it will have a salvage
value of P18,000. Compute for the depreciation charge for the 1st year using double
declining balance method.
◦ Given: FC= P90,000 SV= P18,000 n= 8 t=1
◦ Find: D
𝟐
◦ Solution: D = 𝑭𝑪(𝟏 − 𝒌)𝒕−𝟏 𝒌 𝒌 = 𝟏 − 𝒏 𝑺𝑽/𝑭𝑪 k= 𝒏
𝟏−𝟏
𝟐 𝟐
◦ D = 𝟗𝟎𝟎𝟎𝟎 𝟏 − = 𝟐𝟐𝟓𝟎𝟎
𝟖 𝟖

◦ If depreciation rate is for declining balance

◦ 𝒌 = 𝟏 − 𝟏 𝟏𝟖𝟎𝟎𝟎/𝟗𝟎𝟎𝟎𝟎 = 0.8
𝟏−𝟏
◦ 𝑫 = 𝟗𝟎𝟎𝟎𝟎 𝟏 − 𝟎. 𝟖 𝟎. 𝟖 = 72,000
The Service Output Method
◦ This method assumes that the depreciation that has taken place is directly proportional
to the quantity of output of the property up to that time.
◦ This method has advantage of making the unit cost of depreciation constant and
giving low depreciation expenses during period of low production.

Let T= total units of output up to the end of life

Qn= total number of units of output during the nth year
𝑭𝑪−𝑺𝑽
Depreciation per unit of output= 𝑻
𝑭𝑪−𝑺𝑽
Dn = ( ) (Qn)
𝑻
◦ A television company purchased machinery for P100,000 on July 1, 1979. It is estimated
that it will have a useful life of 10 years; scrap value of P4000, 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 hours in 1980. The
machinery produces 36,000 units in 1979 and 44,000 units in 1980. Compute the
depreciation for 1980 using each method given below:
a) Straight Line
b) Working hours
c) Output method
◦ Given: FC= P100,000 SV- P4,000 n= 10 YEAR
◦ T= 400,000 UNITS H= 120,000 HOURS
◦ 1) Straight line
𝑭𝑪−𝑺𝑽 𝟏𝟎𝟎,𝟎𝟎𝟎−𝟒,𝟎𝟎𝟎
D= = = P9,600
𝒏 𝟏𝟎

𝑭𝑪−𝑺𝑽 𝟏𝟎𝟎,𝟎𝟎𝟎−𝟒,𝟎𝟎𝟎
2) Dn = ( ) (H80)= D80 = ( ) (18,000)= P14,400
𝑯 𝟏𝟐𝟎,𝟎𝟎𝟎

𝑭𝑪−𝑺𝑽 𝟏𝟎𝟎,𝟎𝟎𝟎−𝟒,𝟎𝟎𝟎
3) D80 = ( ) (Q )=
80 ( ) (44,000) = P10,560
𝑻 𝟒𝟎𝟎,𝟎𝟎𝟎