Chapter 3.

DEPRECIATION
BOND
AND
DEPLETION
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University
 Learning Objectives

Understand basic terms of asset depreciation

Determine the purpose of depreciation

Apply methods of depreciation.

Explain depletion and apply cost

depletion & percentage depletion
133 ©2017 Batangas State University methods.
 Definitions

Depreciation - the decrease in the value of a physical

property with the passage of time.

Types of Depreciation
1.Physical depreciation – this is due to the reduction of
the physical ability of an equipment or asset to produce
results.
2.Functional depreciation – this is due to the lessening
in the demand for the function which the property was
designed to render.

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 Purpose of Depreciation

1. To enable the cost of depreciation to be included as a

cost in the production of goods and services.

2. Annual costs of depreciation are being put up in a

fund called depreciation reserve for replacement of
the property.

3. To recover capital invested in the property.

4. Provide as an additional capital termed as depreciation

reserve.
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 Properties Depreciable Assets
1. It must have a determinable life and the life must be
greater than 1 year.

2. It must be something used in business or held to

produce income.

3. It must be something that gets used up, wears out

decays, become obsolete, or loses its value due to
natural causes.

4. It must not be an inventory stock in trade or

investment property.
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 Depreciation Terminology

Initial Investment/First Cost (FC) – the cost of

acquiring an asset, including transportation expenses and
other normal costs of making the asset serviceable for its
intended use.
Book Value (BV)– worth of property or an asset as
shown on the accounting records of the company. It is the
original cost of the property less all allowable
depreciation deductions.
Salvage Value (SV)- the amount that will be paid by a
willing buyer to a willing seller for a property after
depreciation is competed.
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 Depreciation Terminology
Useful life (L)– the expected period that a property will
be used in trade or business to produce income.
Physical life – the length of time during which the
property is capable of performing the function
Economic life – length of time during which the property
may be operated at a profit.
Recovery period (n)– the number of years over which
the basis of property is recovered through the accounting
process.
Recovery rate (i)- a percentage for each year of the
recovery period that utilized to compute an annual
depreciation deduction.
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 Methods of Depreciation Symbols
d = annual cost of depreciation
L = useful life
n = any year during the life of the property
dn = depreciation cost during year n
Dn = total cost of depreciation after n years
FC = initial investment, original cost, first cost
SV = salvage value/scrap value/residual value
BV = book value at the end of n years

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 Methods of Depreciation

1. Straight Line Method (SLM) –The simplest

depreciation method. this method assumes that the
loss in the value is directly proportional to the age of
the equipment or asset.
a. Annual cost of depreciation
𝐹𝐶 −
𝑑 = 𝑆𝑉
�
b. Total depreciation after n�
years
Dn = nd
c. Book value at the end of n
years
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 Straight Line Method
Example 1. An electric balance costs P90,000 and has an
estimated salvage value of P8,000 at the end of its 10 years’
life time. What would be the book value after three years,
using SLM. (Ans. P65,400)
Given:
Fc = P90,000
SV = P8,000
L =10 years
n=3 years

Required:
BV3
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 Straight Line Method

Solution: Find the annual deprecation (d)

𝐹𝐶 − 𝑆𝑉 𝑃90,000 −
𝑑 = 𝑃8,000 = =
𝐿
Get the total depreciation after 3 years 𝑃8,200
10

D3 = nd = 3(P8,200) = P24,600

Find the book value after 3 years by subtracting the total

depreciation after 3 years to original cost.

BV3 = FC – D3 = P90,000 – P24,600 = P65,400

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 Straight Line Method
Example 2. A new electric saw for cutting small piece of lumber in
a furniture manufacturing plant has a cost basis of
$4,000 and a 10 –year depreciable life. Determine the annual
depreciation amounts and the book value after 5 years.
Given:
FC = $4,000
L =10, N =5

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 Straight Line Method
Example 2. A new electric saw for cutting small piece of lumber in a furniture
manufacturing plant has a cost basis of $4,000 and a 10 –year depreciable life. Determine the
annual depreciation amounts and the book value after 5 years.
(Ans. d=$400, BV5=$2000)
CALTECH (SLM):
Mode – 3(STAT) – choose 2 (A+Bx)
Input value then press On:
X Y
0 FC
L SV

Annual dep.(d) = shift – 1(stat) – choose 5(reg) – 2(B)

Total dep(Dn) = FC – Ny-hut
Book Value = `Ny-hut
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 Sinking Fund Method
2. Sinking Fund Method (SFM) - This method assumes that
a sinking fund is established in which funds will accumulate
for replacement. The total depreciation that has taken place up
to any given times is assumed to be equal to the accumulated
amount in the sinking fund at that time.
a. Annual cost of depreciation
𝑖
𝑑 = (𝐹𝐶 −
𝑆𝑉) (1 + 𝑖) 𝐿−1

b. Total depreciation after n years

(1+𝑖)𝑛−1
𝐷𝑛
𝑖
c. Book value=at𝑑the end of n years
145
BVn =
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 Sinking Fund Method
Example 1: A broadcasting corporation purchased an equipment for
P53,000 and paid P1,500 for freight and delivery to the job site. The
equipment has a normal life of 10 years with a trade-in-value of P5,000
against the purchase of a new equipment at the end of life. Determine the
annual depreciation and the book value the end of 5 years if interest is
6.5% compounded annually.
Given: FC = P54,500 (Original cost + freight and delivery)
SV = P5,000
L = 10
n=5
i=6.5%
Requi
red: d
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 Sinking Fund Method
Solution: Find the annual deprecation
d 𝑖
𝑑 = ( 𝐹𝐶 −
𝑆𝑉 ) (1 + 𝑖)𝐿−1

0.065
𝑑= = 𝑃3,668.1822
𝑃54,500 − 𝑃5,000 1 + 0.065 10 − 1

Get the total depreciation after 5 years (1 + 𝑖)𝑛 − 1

𝐷𝑛
𝑖
=𝑑

(1 + 0.065)5 − 1
𝐷 5 = 𝑃3,668.1822 = 𝑃20,885.3125
0.065

Find the book value after 5 years by subtracting the total depreciation after 5 years to original
cost.
BV5 = FC – D5 = P54,500– P20,885.3125 = P33,614.6875
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 Sinking Fund Method
Example 2. A firm bought an equipment for P56,000. Other expenses including
installation amounted to P4,000. the equipment is expected to have a life of 16
years with a salvage value of 10% of the original cost. Determine the book value at
the end of 12 years by SFM at 12% interest.
Given:
FC = P60,000 (Original + Installation)
SV = 0.10(P60,000) = P6,000
L = 16, N = 12, I = 0.12

d= P1,263.0610
D12 = P30,481.6194

BV12 = P60,000 – P30,481.6194 = P29,518.3806

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 Sinking Fund Method
Example 2. A firm bought an equipment for P56,000. Other expenses including
installation amounted to P4,000. the equipment is expected to have a life of 16 years with a
salvage value of 10% of the original cost. Determine the book value at the end of 12 years
by SFM at 12% interest. (Ans. P29518.40)

CALTECH (SFM):
Annual dep.(d) =

Book Value (BV) = FC -

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 Declining Balance Method
3. Declining Balance Method. In this method, sometimes called the
constant percentage method or the Matheson Formula, 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 k, the rate of depreciation.

𝑛 𝐵𝑉 𝐿
𝑘=1 𝑆𝑉 𝑜𝑟 1 −
𝐹𝐶 𝐹𝐶
−
Where: k = decline rate, whose value must always be < 1 and the salvage
value must not be zero.
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 Declining Balance Method
a. Annual depreciation d
𝑑𝑛 = 𝐹𝑐

(1 − 𝑘) 𝑛−1
c. Total depreciation Dn
b. Salvage value𝐷𝑛 = 𝐹𝑐(1 − 𝑛 )
𝑆𝑉 = 𝐹𝑐(1 − 𝑘) 𝐿
1−𝑘

d. Book value at the end of n years

151 BVn = FC – Dn
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 Declining Balance Method
Example 1. Determine the rate of depreciation, the total
depreciation up to the end of the 8th year and the book
value at the end of 8th years for an asset that costs
P15,000 new and has an estimated scrap value of P2,000
at the end of 10 years by DBM.
Given: FC = P15,000
SV= P2,000
L = 10 years
n = 8 years

Required:
k, D8 and
BV8
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 Declining Balance Method
Solution: Find the value of rate of depreciation
k 𝐿 𝑆𝑉 10 2,000
𝑘=1− =1− = 𝟎. 𝟏𝟖 𝟐5
𝐹𝐶 15,000

Total depreciation D8
𝐷𝑛 = 𝐹𝑐(1 − 𝑛 )

= 𝑷𝟏𝟐 , 𝟎𝟎𝟕.7812
1−𝑘
Book value
𝐷8 =at15,000
the end of
1 −8 years 1 −
0.1825 8
BV8 = FC – D8 = P15,000-P12,007.7812 = P2,992.2188

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 Declining Balance Method
Example 2. A machine worth P50,000 depreciates in value each year by
20% of its value at the beginning of that year. Find its book value when its
9 years old.
Given:
FC = P50,000
K = 0.20
N=9
BV9 = ?

BV9 =

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 Declining Balance Method
Example Determine the rate of depreciation, the total depreciation up to the end of the 8th
year and the book value at the end of 8th years for an asset that costs P15,000 new and has an
estimated scrap value of P2,000 at the end of 10 years by DBM. (Ans. P2,992.55)

CALTECH (DBM):
Mode – 3(STAT) – choose 6 (A*B^x)
Input value then press On:
X Y
0 FC
L SV
Y-hut = shift – 1(stat) – choose 5(reg) – 5(y-hut)
Dep. On the “nth year” = (n-1)(y-hut) – n(y-hut) = (8-1)(y-hut) – 8(y-hut) = 668.0114
Total dep(Dn) = FC – n(y-hut) = 12007.4443
Book Value = n(y-hut) = 2,992.5557
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 Double Declining Balance Method
4.Double Declining Balance Method (DDBM) - This method is
very similar to the DBM except that the rate of depreciation k is
replaced by 2/L
a. Annual depreciation d
2
𝑑𝑛 = 𝐹 𝑐 (1 − 2 )𝑛−1
� 𝑙
b. Salvage �
value 2𝐿
𝑆𝑉 = 𝐹 𝑐(1 − )
�
c. Total depreciation Dn �
𝑛
2
𝐷𝑛 = 𝐹𝑐(1 − 1 )
�
−
d. Book value at the end of n years �
BVn = FC – Dn = FC(1-K)^n
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 Double Declining Balance Method
Example 1. Determine the rate of depreciation, the total
depreciation up to the end of the 8th year and the book
value at the end of 8th years for an asset that costs
P15,000 new and has an estimated scrap value of P2,000
at the end of 10 years by DDBM.
Given: FC = P15,000
SV = P2,000
L = 10 years
n = 8 years

Required:
k, D8 and
BV8
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 Double Declining Balance Method
Solution: Find the value of rate of depreciation k
2 2
𝑘= = = 0.20 𝑜𝑟
𝐿
20%
Total depreciation D10
8
n
2 𝑛
𝐷𝑛 = 𝐹𝑐(1 − )
�

= 𝑷𝟏𝟐 , 𝟒𝟖𝟑.
2 �
𝐷8 = 15,000 1 −1 − 1
10
− 8 𝟒 176
Book value at the end of 8 years
BV8 = FC – D8 = P15,000-P12,483.4176 = P2,516.5824
24
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 Double Declining Balance Method
Example 2. A Die Attach machine was bought for $200,000 and used
it for 10 years. What is the book value of the machine after 5 years if
the salvage value is $20,000 using the double declining balance
method?
Given:
FC = $200,000
SV = $20,000
L = 10
N=5

BV5 =

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 Double Declining Balance Method
Example 2. A Die Attach machine was bought for $200,000 and used it for 10
years. What is the book value of the machine after 5 years if the salvage value is
$20,000 using the double declining balance method? (Ans. $65,536)

CALTECH (DDBM):
Mode – 3(STAT) – choose 6 (A*B^x)
Input value then press On:
X Y
0 FC
1 (1-2L)(FC)
Y-hut = shift – 1(stat) – choose 5(reg) – 5(y-hut)
Dep. On the “nth year” = (n-1)(y-hut) – n(y-hut)
Total dep(Dn) = FC – n(y-hut)
Book Value = n(y-hut)
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 Sum of the Year Digit Method
5. Sum of the year digit method (SOYDM) - It is a method
of evaluating depreciation where the depreciation changes
from year to year.
a. Sum of years Digit (SOYD) =
b. Depreciation
Dtn =
c. Book Value
BV = FC – Dn

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 Sum of the Year Digit Method
Example 10. A machine costs P70,000 and an estimated life
of 10 years with a salvage value of P5,000. What is the
depreciation at 7th year and the book value after 5 years
using the SOYD method?
Given:
FC = P70,000
SV= P5,000
L = 10
n = 7,5

Required:
d7, BV5
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 Sum of the Year Digit Method
Solution: Reverse Digits:
SOYD = = 55 1 – 10
2–9
3–8
Depreciation @ 7th Year: 4–7
D7 = 5–6
6–5
7–4
Book Value after 5 years: 8–3
BV5 = 9–2
10 – 1

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 Sum of the Year Digit Method
Example 10. A machine costs P70,000 and an estimated life of 10 years with a
salvage value of P5,000. What is the depreciation at 7th year and the book value
after 5 years using the SOYD method?
CALTECH (SOYDM):
Mode – 3(STAT) – choose 3 (_+cx2)
Input value then press On:
X Y
0 FC
L SV
L+1 SV
Y-hut = shift – 1(stat) – choose 5(reg) – 6(y-hut)
Dep. On the “nth year” = (n-1)(y-hut) – n(y-hut)
Total dep(Dn) = FC – n(y-hut)
Book Value = n(y-hut)
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 Service – Output Method

6. Service-Output Method (SOM) - This method assumes

that the total depreciation that has taken place is directly
proportional to the quantity of output of the property up to
that time. This method has the advantage of making the unit
cost of depreciation constant and giving low depreciation
expense during periods of low production.

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 Service – Output Method
6.1 Service Method (Number of hours used)
Let H= total units of hours used and within the useful life
Hn = total number of hours used at nth year.
𝑑 𝐹𝐶 − d (Hn)
𝑆𝑉 = and 𝑑𝑛 = �
ℎ𝑟 𝐻
ℎ𝑟 �
6.2 Output Method (Number of units produced)
Let T= total number of units produced w/in the useful life.
Tn = number of units produced at the nth year
𝑑 𝐹𝐶 − 𝑑
= and 𝑑𝑛 = (Tn)
𝑆𝑉
𝑢𝑛𝑖𝑡 𝑇 𝑢𝑛𝑖𝑡

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 Service – Output Method
Example 11. A television Company purchased machinery for P100,000 and it
has an estimated useful life of 10 years, scrap value of P4,000, production of
400,000 units and working hours of 120,000.
The company uses the machinery for 18,000 hr during its 1st year and produces
44,000 units. Compute the annual depreciation using:
A. Working hours
B. Output method
Given: Fc = P100,000 Sv = P4,000 L= 10 years
H = 120,000 hrs Hn = 18,000 hrs T = 400,000 units Tn = 44,000
units
Required: dn

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 Service – Output Method
Solution:
A. Working hours or service method
𝑑 100,000 −
=
4,000 =
ℎ𝑟 120,000
0.8
𝑷𝟏𝟒 , 𝟒𝟎𝟎. 𝟎𝟎
𝑑𝑛 = 0.8 18,000 =

B. Output𝑑Method
𝐹𝐶 − 100,000 −
𝑆𝑉 = 4,000 =
= 𝑷𝟏𝟎 , 𝟓𝟔𝟎. 𝟎𝟎
𝑢𝑛𝑖𝑡 𝑇 400,000
= 0.24
𝑑𝑛 0.24
= 44,000
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 Practice Problem
1. An argon gas processor has a first cost of P20000 with a salvage value of P5000 after
5 years. Find the yearly depreciation and Book Value after 3 years.
2. A set of Wire Bond machine costs $500,000. This amount includes freight and
installation charges estimated at 10% of the original price. If the machine shall be
depreciated over a period of 10 years with a salvage value of $5,000, and money is
worth 6% per year, what is the annual depreciation charge?
3. Determine the total depreciation up to the end of 6 years for a large dryer that costs
P50000 when new and has an estimated salvage value of P2,000 at the end of 10 years
by the double declining balance method.
4. An asset is purchased for P9000. Its estimated economic life is 10 years after which it
will be sold for P1000. Find the depreciation in first three years and Book Value on the
5th year using SOYD.

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 Practice Problem
1. An argon gas processor has a first cost of P20000 with a salvage value of P5000 after
5 years. Find the yearly depreciation and Book Value after 3 years.
Given:
FC = P20,000
SV = P5,000
L=5
N=3
Required: d & BV3

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 Practice Problem
2. A set of Wire Bond machine costs $500,000. This amount includes freight and
installation charges estimated at 10% of the original price. If the machine shall be
depreciated over a period of 10 years with a salvage value of $5,000, and money is worth
6% per year, what is the annual depreciation charge?
Given:
FC = $500,000
SV = $5,000
L = 10, i= 0.06
Required: d=?

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 Practice Problem
3. Determine the total depreciation up to the end of 6 years for a large dryer that costs
P50000 when new and has an estimated salvage value of P2,000 at the end of 10 years by
the double declining balance method.
Given:
FC = P50,000
SV = P2,000
L = 10, n = 6
Required: D = ?

) = P36,892.80

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 Practice Problem
4. An asset is purchased for P9000. Its estimated economic life is 10 years after which it
will be sold for P1000. Find the depreciation in the first three years and Book Value on the
5th year using SOYD. Reverse
Given: digits:
1 10
FC = P9,000 2 9
SV = P1,000 3 8
L = 10 4 7
5 6
Required: D3 6 5
7 4
8 3
9 2
10 1

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