0% found this document useful (0 votes)
42 views17 pages

Depreciation

Depreciation is the reduction in value of an asset over time. There are several methods of calculating depreciation including straight-line, units of production, double declining balance, and sum-of-the-years digits. The document provides examples and formulas for calculating depreciation expense under each method.

Uploaded by

Kika Calafat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
0% found this document useful (0 votes)
42 views17 pages

Depreciation

Depreciation is the reduction in value of an asset over time. There are several methods of calculating depreciation including straight-line, units of production, double declining balance, and sum-of-the-years digits. The document provides examples and formulas for calculating depreciation expense under each method.

Uploaded by

Kika Calafat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 17

Lecture 10

Depreciation and its


Methods.
What Is Economic Depreciation?
 Economic depreciation is a measure of the
decrease in the market value of an asset over
time from influential economic factors.
Depreciation :
 It is the reduction in the value of an asset that
occurs over time due to usage, wear and tear,
or obsolescence.
Methods of Depreciation

 There are several method of depreciation and


different formulas for determining the book
value of an asset. The most common
depreciation methods include:

 Straight-line
 Double declining balance
 Units of production
 Sum of years digits
1: Straight-Line Depreciation Method

 Straight-line depreciation is a very common,


and the simplest, method of calculating
depreciation expense. In straight-line
depreciation, the expense amount is the
same every year over the useful life of the
asset.
 Depreciation Formula for the Straight Line

Method:
 Depreciation Expense = (Cost – Salvage value)

/ Useful life
Example
Consider a piece of equipment that costs
$25,000 with an estimated useful life of 8
years and a $0 salvage value.

Depreciation Expense = (Cost – Salvage value)


/ Useful life

Depreciation Expense = ($25,000 – $0) / 8 =


$3,125 per year
2: Units of Production Depreciation Method

 The units-of-production depreciation method


depreciates assets based on the total number
of hours used or the total number of units to
be produced by using the asset, over its
useful life.
 The formula for the units-of-production method:
 Depreciation Expense = (Number of units
produced / Life in number of units) x (Cost –
Salvage value)
Example
Consider a machine that costs $25,000, with an
estimated total unit production of 100 million and a
$0 salvage value. During the first quarter of activity,
the machine produced 4 million units.

To calculate the depreciation expense using the


formula
Depreciation Expense = (Number of units produced /
Life in number of units) x (Cost – Salvage value)

Depreciation Expense = (4 million / 100 million) x


($25,000 – $0) = $1,000
3: Double Declining Balance
Depreciation Method
The method reflects the fact that assets are
typically more productive in their early years
than in their later years – also, the practical fact
that any asset (think of buying a car) loses
more of its value in the first few years of its
use. With the double-declining-balance
method, the depreciation factor is 2x that of
the straight-line expense method.
 Example
 Consider a piece of property, plant, and

equipment (PP&E) that costs $25000, with an


estimated useful life of 8 years and a $2,500
salvage value. To calculate the double-
declining balance depreciation, set up a
schedule:
The information on the schedule is
explained below:
The beginning book value of the asset is filled in at the beginning
of year 1 and the salvage value is filled in at the end of year 8.
The rate of depreciation (Rate) is calculated as follows:
Expense = (100% / Useful life of asset) x 2
Expense = (100% / 8) x 2 = 25%
or
Depreciation Expense =1/estimated working life x 2 x balance
 3. Multiply the rate of depreciation by the
beginning book value to determine the expense
for that year. For example, $25,000 x 25%
(0.25)= $6,250 depreciation expense.
 4. Subtract the expense from the beginning book
value to arrive at the ending book value. For
example, $25,000 – $6,250 = $18,750 ending
book value at the end of the first year.
 5. The ending book value for that year is the
beginning book value for the following year. For
example, the year 1 ending book value of
$18,750 would be the year 2 beginning book
value. Repeat this until the last year of useful life.
4: Sum-of-the-Years-Digits
Depreciation Method
 The sum-of-the-years-digits method is one
of the accelerated depreciation methods. A
higher expense is incurred in the early years
and a lower expense in the latter years of the
asset’s useful life.
 The depreciation formula for the sum-of-

the-years-digits method:
 Depreciation Expense = (Remaining life /

Sum of the years digits) x (Cost – Salvage


value)
Example:
 An item of equipment acquried on january 1
at a cost of $100,000 has an estimated life of
10 years.required assuming that the
equipment will have a salvage value of
$10,000 determine the depreciation for each
of the first three years.
 formula
 Depreciation Expense =remaining no of
year/sum of total no of year x(cost – salvage
value)
 Depreciation Expense =remaining no of
year/sum of total no of year x(cost – salvage
value)
 Sol:
 10+9+8+7+6+5+4+3+2+1=55
 For year 1:

10/55x (100,000-10,000)=16363
For year 2:
9/55x(90,000)=14727
For year 3:
8/55x (90,000)=13090
Example
Consider a piece of equipment that costs
$25,000 and has an estimated useful life of 8
years and a $0 salvage value. To calculate the
sum-of-the-years-digits depreciation,
 The information in the schedule is explained below:
 The depreciation base is constant throughout the years and is
calculated as follows:
 Depreciation Base = Cost – Salvage value
 Depreciation Base = $25,000 – $0 = $25,000
 2. The remaining life is simply the remaining life of the asset.
For example, at the beginning of the year, the asset has a
remaining life of 8 years. The following year, the asset has a
remaining life of 7 years, etc.
 3. RL / SYD is “remaining life divided by sum of the years.” In
this example, the asset has a useful life of 8 years. Therefore,
the sum of the years would be 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8
= 36 years. The remaining life in the beginning of year 1 is 8.
Therefore, the RM / SYD = 8 / 36 = 0.2222.
 4. The RL / SYD number is multiplied by the depreciating
base to determine the expense for that year.
 5. The same is done for the following years. In the beginning of year
2, RL / SYD would be 7 / 36 = 0.1944. 0.1944 x $25,000 = $4,861
expense for year 2.

You might also like