Chapter 5
Problem and solution
1. Straight line Method
An electronic balance costs P90, 000.00 and has an estimated salvage value of
P8,000.00 at the end of 10 years’ life time. What would be the book value after
three years, using the straight line method in solving for the depreciation?
Solution:
𝐶𝑜 − 𝐶𝐿
𝑑=
𝐿
P90,000− P8,000
𝑑= = 𝑃8, 200
10
𝐷3 = 𝑛𝑑 = (3)(𝑃8, 200) = 𝑃24, 600
𝐶3 = 𝑃90, 000 – 𝑃24, 600 = 𝑃65, 400
2. The Sinking Fund Formula
A broadcasting corporation purchased an equipment for P53,000 and paid P1,500
for freight and deliver charges to the job site. The equipment has a normal life of
10 years with a trade-in value of P5,000.00 against the purchase of a new
equipment at the end of the life.
a) Determine the annual depreciation cost by the straight line method.
b) Determine the annual depreciation cost by the sinking fund method.
Assume interest of 6.5% compounded annually.
Solution:
𝐶𝑂 = 𝑃53, 000 + 𝑃1, 500 = 𝑃54, 500
𝐶𝐿 = 𝑃5, 000
𝐶𝑜 − 𝐶𝐿 𝑃54,500−𝑃5,000
a. 𝑑 = 𝐿
=
10
= 𝑃4, 950
𝐶𝑜 − 𝐶𝐿 𝑃54,500−𝑃5,000
b. 𝑑 = 𝐹[𝐴,𝑖%,𝐿]
= (1+0.065)10 −1
= P3,668.18
0.065
3. Declining Balance Method
A certain type of machines loses 10% of its value each year. The machine costs
P2000 originally. Make out a schedule showing the yearly depreciation, the total
depreciation and the book value at the end of each year for 5 years.
Solution:
Year Book value at Depreciation Total Book value at
beginning of during the year depreciation at end of year
year 10% end of year
1 P2,000.00 P200.00 P200.00 P1,800.00
2 P1,800.00 P180.00 P380.00 P1,620.00
3 P1,620.00 P162.00 P542.00 P1,458.00
4 P1,458.00 P145.80 P687.80 P1,312.20
5 P1,312.20 P131.22 P819.02 P1,180.98
4. Double Declining Balance(DDB) Method
Determine the rate of depreciation, the total rate of depreciation up to the end of
the *th year and the book value at the end of 8 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 (a) the
declining balance method and (b) the double declining balance method
Solution:
𝐶𝑂 = 𝑃15,000 𝐶𝐿 = 𝑃2,000 𝐿 = 10 𝑛 = 8
a. Declining balance method
𝐿 𝐶𝐿 10 𝑃2, 000
𝑘 =1− √ = 1− √ = 0.1825 𝑜𝑟 18.25%
𝐶𝑂 𝑃15, 000
𝐶8 = 𝐶𝑂 (1 − 𝑘)8 = 𝑃15, 000 (1 − 0.1825)8 = 𝑃2992.22
𝐷8 = 𝐶𝑂 − 𝐶8 = 𝑃15, 000 − 𝑃2992.22 = 𝑃12, 007.78
b. Double declining balance method
2 2
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = = 10 = 0.2 𝑜𝑟 2%
𝐿
2 2
𝐶8 = 𝐶𝑂 (1 − 𝐿) = 𝑃15, 000(1 − 10)8 = 𝑃2, 516.58
𝐷8 = 𝐶𝑂 − 𝐶8 = 𝑃15, 000 − 𝑃2, 516.58 = 𝑃12, 483.42
5. The Sum-of-the-Years’-Digits (SYD) Method
A structure costs P12,000 new. It is estimated to have a life of 5 years with a
salvage value at the end of life of P1,000. Determine the book value at the end of
each year of life.
Solution:
𝐶𝑂 – 𝐶𝐿 = 𝑃12,000 – 𝑃1,000 = 𝑃11,000
Year Year in reverse Depreciation during the year Depreciation during
order the year
1 5 (5/15)(P11,000)= P3,666.67 P8,333.33
2 4 (4/15)(P11,000)= P2,933.33 P5,400
3 3 (3/15)(P11,000)= P2,200 P3,200
4 2 (2/15)(P11,000)= P1,466.67 P1,733.33
5 1 (1/15)(P11,000)= P733.33 P1,000
Σ of digits = 15
6. The Service-Output Method
A television Company purchased machinery for P100,000 on July 1,1979. It is
estimated that it will have a useful life of 10years; scrap value of P4,000,
production of 400,000 hours and working hours of 120,000. The company uses
the machinery for 14,000 hours in 1979 and 18,000 hours in1980. The machinery
produces 36,000 units in 1979 and 44,000 units in 1980. Compute the
depreciation for 1980 using each method given below:
(1) Straight line
(2) Working hours
(3) Output method
Solution:
𝐶𝑂 = 𝑃100,000 𝐶𝐿 = 𝑃4,000 𝐿 = 10 𝑦𝑒𝑎𝑟𝑠
𝑇 = 400,000 𝑢𝑛𝑖𝑡𝑠 𝐻 = 120,000 ℎ𝑜𝑢𝑟𝑠
𝑇1980 = 44, 000 𝑢𝑛𝑖𝑡𝑠 𝐻1980 = 18, 000 𝑢𝑛𝑖𝑡𝑠
𝐶𝑜 − 𝐶𝐿 𝑃100,000−𝑃4,000
(1) 𝑑1980 = 𝐿
=
10
= 𝑃9, 600
𝐶𝑜 − 𝐶𝐿 𝑃100,000−𝑃4,000
(2) 𝑑1980 = 𝐻
(𝐻1980 ) =
120,000
(18, 000) = 𝑃14,400
𝐶𝑜 − 𝐶𝐿 𝑃100,000−𝑃4,000
(3) 𝑑1980 = 𝑇
(𝑇1980 ) =
400,000
(44, 000) = 𝑃10,560
Depletion:
A gold mine that is expected to produce 30,000 ounces of gold is purchased for P2,
400, 000. The gold can be sold for P450 per ounce; however, it cost P265 per ounce
for mining and processing costs. If 3,500 ounces are produced this year, what will be
the depletion allowance for
(a) Unit depletion
(b) Percentage depletion
Solution:
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦
(a) 𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 = (𝑈𝑛𝑖𝑡 𝑠𝑜𝑙𝑑 )
𝑇𝑜𝑡𝑎𝑙 𝑢𝑛𝑖𝑡𝑠 𝑖𝑛 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦
2, 400,000
𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝐶𝑜𝑠𝑡 = (3500) = 𝑃280, 000
30, 000
(b) 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 = [(450)(3500)] − [(265)(3500)] = 𝑃647, 500
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 = 𝑃647, 500 (0.50) = 𝑃323,750
